Rebasing looks inevitable as the company has other needs for its cash
Thursday 18 Jul 2019 Author: Steven Frazer

UK telecoms giant BT (BT.A) appears to be softening up investors to a future cut to its £1.5bn a year dividend as it balances rising fibre roll-out investment.

BT’s management estimate that it will cost an extra £400m to £600m a year to accelerate the roll-out of its fibre-to-the-premises network.

There are several potential levers to pull to free up additional funding, including deeper cost cutting or taking on more debt. However, BT chairman Jan du Plessis appears to favour rethinking shareholder payouts, hinting at as much during BT’s shareholder meeting on 10 July.

In May BT raised its full fibre roll-out targets from 3m homes and businesses to 4m by March 2021. It currently serves full fibre to approximately 1.2m UK premises. Management has also pledged to extend its fibre-to-the-premises network to 15m properties by the middle of the next decade.

BT chief executive Philip Jansen, who was appointed to the top job in February this year, confirmed in May that the company would stick to its 15.4p dividend per share commitment for the 12 months to 31 March 2019, and gave a firm indication that a similar payout would be on the cards for the current financial year.

Investors have been dubious over the sustainability of dividends at this level for some time. BT’s share price has largely stumbled lower over the past four years, pushing the income yield up to 8.1%, based on the current 189p share price.

Supportive analysts point out that BT has ‘mended fences’ with regulator Ofcom over Openreach, a BT subsidiary which controls its broadband network, by offering easy access for rivals to share the network.

BT has also been able to retire some of the risk associated with its multi-billion pound pension scheme, which is running with a £6bn deficit.

Yet BT is already in the middle of £1.5bn a year cost-cutting plan that includes shedding jobs, closing offices and selling property.

Analysts at investment bank Berenberg anticipate a 30% cut to the 2021 dividend to 10.8p per share, potentially slashing £500m off BT’s annual dividend bill. That would still imply a 5.7% income yield at current share price levels, and allow scope to rebuild the payout in the medium-term.

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