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BT dividend cut cannot be ruled out, says Morgan Stanley ahead of earnings

BT's new chairman Jan Du Plessis is expected to focus on repairing relations with Ofcom as part of the company's strategy
BT publishes its fourth quarter results and strategy update on Thursday

BT Group plc (LON:BT.A) could cut its future dividends to prioritise investment in upgrading the UK’s broadband infrastructure to improve internet speeds, according to Morgan Stanley.

The telecoms group, which publishes its fourth quarter earnings and strategy update on Thursday, plans to connect fibre optic broadband into three million premises by the end of 2020.

The company is under pressure to follow through on these plans after regulator Ofcom eased wholesale price controls on the group’s network subsidiary Openreach to support the investment.

READ: BT downgraded as BarCap wonders whether "wholesale only" competitors could emerge

Morgan Stanley said new chairman Jan Du Plessis, who left Rio Tinto PLC (LON:RIO) to replace Mike Rake last November, is likely to prioritise repairing relations with Ofcom as part of BT’s strategy.

“This could require a very visible demonstration that network investment should be prioritised ahead of shareholders and as such, a dividend cut in the future cannot be ruled out,” the broker said.

Ofcom’s chief executive Sharon White said in April that “incumbents face a choice in my view — fibre up or risk fading away” while the Department for Digital, Culture, Media and Sport (DCMS) will publish a report in summer on the future of the telecoms infrastructure investment.

Morgan Stanley said it thinks BT will wait for the government to publish the report before updating its target for fibre to the premises.

BT's triennial pension valuation 

It expects BT to publish the results of its triennial pension valuation at the strategy update.

Morgan Stanley forecasts a pension deficit of £13bn, compared to consensus estimates of £10-12bn, and average top-up payments of £1.1bn per year for the next three years.

“A positive outcome could involve the announcement of a ‘pension asset transfer’, which is essentially an asset-backed contribution to provide a one-time deficit reduction (eg. using Openreach's network),” the broker said.

“A negative outcome come involve a higher deficit and/ or restrictions on the ability for future dividend payments. Each £1bn delta to the pension value is worth 10p to our price target.”

Morgan Stanley predicts lower revenues in final quarter

For the fourth quarter, Morgan Stanley expects revenue to fall 1.1% to £6.05bn with growth in the EE mobile network offset by declines in the business and public sector, wholesale and ventures, Openreach and Global Services units.

Underlying earnings (EBITDA) is expected to increase 0.5% to £2.08bn in the final quarter on lower costs.

READ: BT merges UK enterprise businesses to simplify operations

In April, BT said it would create a new division called BT Enterprise that will merge the business, public sector, wholesale and ventures units. The move is part of a wider restructuring to simplify its operations and bring down costs.

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