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BT's turnaround plan pays off but challenges remain for incoming boss

Analysts still think BT's dividend yield looks robust after the company lowered its interim dividend
Philip jansen
Philip Jansen will replace Gavin Patterson as chief executive in February

BT Group PLC (LON:BT) investors are eagerly awaiting to see what Philip Jansen has in store for the company when he leaves the helm of Worldpay to become chief executive of the telecoms giant in February.

Outgoing chief executive, Gavin Patterson, has arguably already done most of the work for Jansen, with a restructuring plan that led to a better-than-expected 24% jump in pre-tax profits to £1.3bn for the first half to September 30. 

READ: BT's interims unlikely to provide much of a swan song for Gavin Patterson

However, Jansen still has a big job on his hands with the first-half results highlighting ongoing struggles in the enterprise businesses and the Global Services international arm as well as the pressure of tighter regulation on the Openreach network.

“The challenges around the business-to-business divisions, and tighter controls on Openreach mean it’s hard to see group revenue growing significantly in the next few years,” said George Salmon, equity analyst at Hargreaves Lansdown.

“Instead any profit growth is likely to come from aggressive cost saving plans.”

CEO says strategy delivering results 

In the group’s interim results statement on Thursday, Patterson said the group was delivering against the core pillars of its strategy with improved customer experience metrics, the acceleration of its roll-out of ultrafast broadband across the UK and progress in transforming its operating model.

READ: BT shares surge despite dividend cut as it expects earnings to hit top end of guidance

As part of Patterson’s strategy, BT has overhauled its consumer division to address tough competition in the mobile and broadband market. Earlier this year, BT launched new packages that blend broadband, mobile and pay-TV as a single service and bill under a so-called “convergence” of its consumer offerings.

The restructuring plan also includes merging the business and public sector division with the wholesale and ventures arm to create BT Enterprise. The newly created unit will provide products and services to small and medium-sized businesses, the corporate and public sectors and other communications providers in the UK and Ireland.

Revenue declines in enterprise units and Openreach

Cost savings achieved under the turnaround boosted first-half profits but revenue fell 2% to £11.6bn with declines in the enterprise divisions, Global Services and Openreach.

The consumer division, which includes the EE and BT Plus businesses, was the only division to deliver revenue growth in the period. thanks to strong sales of its converged product, BT Plus services and newly released mobile phones.  

The lower revenue in Openreach, which runs most of the UK’s telecoms infrastructure, reflected cuts to the wholesale prices it charges providers such as Sky, TalkTalk and Vodafone to use superfast and ultrafast broadband after Ofcom announced new controls earlier this year.

The price cuts were made as Openreach committed to spending billions of pounds on upgrading the UK’s broadband infrastructure with faster and more reliable fibre optics.

The pension deficit challenge

On top of that, the group is trying to bring down its massive pension deficit, which stood at £4.5bn at the end of September based on the IAS accounting measures.

Chief financial officer Simon Lowth warned that pension liabilities could rise by “hundreds of millions of pound” due to a court ruling last week that forced Lloyds Banking Group PLC (LON:LLOY) to amend its pension schemes to make payments equal for men and women after being accused of discrimination.

Despite the challenges remaining, Patterson expects to hand over an improved business to Jansen after surviving years of turmoil including a disappointing financial performance, an accounting scandal in its Italian unit and a tense relationship with Ofcom.

”Poor old Gavin Patterson - he can say the turnaround strategy is paying off and arguably there are some encouraging signs here, but he won't be around to oversee it,” said Neil Wilson, chief market analyst at Markets.com.

Dividend yield still robust after minor cut

BT's first-half results were well received with shares surging 10% to 264p in midday trade.

Investors shrugged off the company's decision to cut the interim dividend by 5% to 4.62p and instead focused on the group's positive outlook with full-year earnings expected to reach the top end of its guidance range. 

Richard Hunter, head of markets at Interactive Investor, said while the dividend decrease was an "unwelcome surprise", it may be a prudent move, given that net cash plunged 71% to £754mln in the first half.

He also thinks it "should not take too much sheen on a dividend yield, which previously stood at an attractive 6.4%".

AJ Bell investment director Russ Mould said: "Given BT’s prior history of dividend cut disasters when things have got tough, it would be a huge step forward if the company can keep the reduction to a fairly modest one."

"A full-year dividend of say 15p a share (down from 15.4p last year) would put the stock on a dividend yield of 5.7%, on a 260p share price."



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