Picture supply: BT Group plc
Because the UK’s largest communications supplier, BT (LSE: BT.A) shares have lengthy been a staple of UK earnings portfolios — notably inside retirement portfolios. The corporate’s dedication to dividend returns has attracted yield-hungry buyers for many years.
Nonetheless, regardless of its lengthy historical past as a protected earnings stream, it is probably not as sustainable as many suppose. With progress slowing because the pandemic, there could also be deeper points that demand nearer scrutiny.
So is BT nonetheless price contemplating as a part of a retirement portfolio? Let’s discover out.
An alluring yield
In terms of earnings shares, the dividend yield is usually the primary issue that buyers take a look at. In BT’s case, the present 4.7% yield is greater than the FTSE 100 common however decrease than it was two years in the past. A part of that’s because of the 48% worth improve up to now 5 years — however dividend progress has additionally slowed.
In earlier years, the group usually elevated dividends by between 6% and 15% yearly. However since reintroducing dividends post-Covid in 2022, they’ve solely grown 5.6%. In lots of instances, dividend progress (or lack thereof) is a litmus check for an organization’s wider monetary image.
So what’s happening?
For retirement-focused buyers looking for passive earnings, BT nonetheless has so much to supply. It’s a really well-established firm with a large model following and dominant market place.
What’s extra, it outlined a transparent dividend progress forecast technique by means of 2028, suggesting modest however constant will increase forward. For buyers searching for a constant passive earnings stream from a dependable firm, that makes it price contemplating.
However whereas these accolades are spectacular, additionally they masks some troubling underlying dynamics.
Trigger for concern
With dividend funds accounting for 84.2% of earnings, protection is way beneath the really helpful ranges. Including to the troubles is persistent income decline, towering debt ranges, and £800m in annual pension obligations. The mixture of these elements places a whole lot of strain on BT’s funds — and when funds are tight, dividends are sometimes the very first thing to be reduce.
Nonetheless, there’s one silver-lining. The corporate’s financials reveal robust free money movement — sufficient to cowl dividend funds 8.5 occasions over. Until that out of the blue modifications, there’s no cause to concern a dividend reduce within the close to future. That doesn’t imply it received’t occur but when these numbers are right, it considerably reduces the chance.
The underside line
BT Group has a comparatively robust dividend historical past however one which’s clearly susceptible to financial downturns. Earlier cuts occurred after the dotcom bubble, the 2008 monetary disaster, and the pandemic.
Nonetheless, in between these intervals, dividends had been elevated nearly yearly with out pause. As such, I wouldn’t anticipate an imminent dividend reduce (barring one other market crash or equally extreme downturn). However whereas its money protection and dependable observe report add confidence, the debt and pension obligations are too massive a threat, in my view.
Threat-averse retirement buyers might want to think about firms with higher earnings protection, extra steady income and decrease debt. Keep in mind, the yield isn’t ‘free cash,’ however fairly compensation for taking over funding threat.
Within the present atmosphere, that 4.7% yield might finally show extra unstable than the choice of looking for earnings from extra defensible, higher-quality dividend payers.
