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Analysts do not expect dividends to return to historical levels for many years to come
Thursday 14 May 2020 Author: Steven Frazer

Frazzled investors in BT (BT.A) were dealt a double blow last week, leaving them to wonder if the shares are still worth holding.

The UK telecoms giant has scrapped its dividend for the next 18 months and reset future shareholder payouts at half previous levels.

On the same day of the dividend news, Virgin Media and UK mobile network 02 unveiled a merger that may create a genuine challenger to BT’s dominance in UK quad-play (internet, landline, mobile and digital TV).

Combined, these pieces of news caused BT’s shares to fall by 8%, taking them to an 11-year low of 104.95p.

According to analysts, Virgin/O2 will have 32.6m mobile, 5.3m broadband, 4.9m fixed voice and 3.7m pay TV subscribers, although BT will remain substantially larger due to its landline dominance and overseas operations.

Numis analyst John Karidis batted off worries about the merging rivals, saying that the fibre to the premises rollout pursued by BT is ‘superior’ to Virgin’s cable network, which ‘reaches just half of the UK’.

Karidis also pointed out that O2 currently has limited mobile spectrum to leverage. But a more powerful rival in an already intensely competitive market will be far from helpful.

BT’s axing of dividends for an extended spell will not be easy to dismiss. The £10.4bn FTSE 100 member had been paying 15.4p per share a year to investors and that income was the chief reason for investors to own the shares. BT has now axed its final payment for the year to 31 March 2020 and for the whole of the current year to March 2021.

Dividends will resume in the financial year to March 2022 at the sharply reduced rate of 7.7p per share. That implies a 2022 income yield of 7.3% which is still attractive to investors, yet only because the share price has fallen so sharply, down 44% in 2020.

Optimists argue that taking a dividend break will free the company to modernise, making the immense infrastructure investments needed to meet national superfast fibre to the home rollout plans. It should also help it to scale up next generation 5G mobile networks while maintaining hefty debt and pension scheme payments.

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