A Closer Look at BT Group's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of BT Group  (LSE: BT-A  ) (NYSE: BT  ) and assessing whether the company is an appetizing pick for income investors.

How does BT Group's dividend history stack up?

Metric 

2010

2011

2012

2013

FY dividend per share

6.9 pence

7.4 pence

8.3 pence

9.5 pence

DPS growth

6.2%

7.3%

12.2%

14.5%

Dividend cover

2.7 times

2.8 times

2.9 times

2.8 times

Source: BT Group company accounts.

BT has steadily ramped up dividend payments over the past four years, moving in line with robust earnings growth, with the annual shareholder payout accelerating over the period and breaching double-digits over the past 24 months.

The telecom giant has also maintained dividend cover well above the widely regarded safety benchmark of two times forward earnings.

What are BT Group's dividends expected to do?

 Metric

2014

2015

FY dividend per share

10.8 pence

12.3 pence

DPS growth

13.7%

13.9%

Dividend cover

2.4 times

2.3 times

Dividend yield

3.6%

4%

Source: Digital Look.

The telecom giant announced last week that revenues dipped 5% in the year ending March 2013, to 18.3 billion pounds, although this did not prevent pre-tax profits advancing 11% to 2.7 billion pounds. The company has undertaken an ambitious cost-saving drive in recent times to improve the bottom line. More excitingly, the firm is intensifying its fight with rival broadcasting giant British Sky Broadcasting to become the U.K.'s foremost "triple play" provider across the television, broadband and telephone spheres.

The company announced the previous day that it would offer its new BT Sport channels to existing broadband clients, a significant broadside to Sky whose stranglehold on Britain's most popular sports has underpinned its stratospheric two-decade rise. BT estimates that more than 20 million homes currently have broadband, and that it provides to around a quarter of those, illustrating the juicy growth opportunities on offer.

The firm's rosy outlook prompted it to raise 2013's final dividend 14% to 6.5 pence, and BT said that it expects full-year payouts to clock in at between 10% and 15% in both 2014 and 2015.

BT's planned dividend policy is affirmed by City analysts, who expect shareholder payouts to keep rumbling higher in healthy mid-digit territory over the medium term. Earnings per share are anticipate to dip 4% during 2014 before bouncing 9% the following year, and I expected earnings growth thereafter to keep dividends moving higher.

How do BT Group's dividend prospects rate against the competition?

 

Prospective Dividend Yield

Prospective P/E Ratio

Fixed-line telecommunications

3.2%

15.6

FTSE 100

3.2%

15.8

Source: Digital Look.

BT currently changes hands on a P/E rating of 12.1 for 2014, less than the corresponding earnings multiples of both its sector peers and the broader FTSE 100, while still offering a better projected dividend yield. Another useful comparison to make is against Sky, which offers a slightly higher forward yield of 3.6% for this year but which trades on a P/E readout of 14.3.

I believe that BT's investment over the past year to improve its appeal as a triple services provider should deliver solid earnings growth in coming years and thus improving shareholder payouts. The firm's sizable pension deficit continues to worry investors, but I believe that the balance sheet remains in very decent shape, particularly when compared with many of its sector counterparts.

The company boasts the financial clout to take on Sky at its own game, and has significantly boosted investment in its television division to boost earnings, as well as ramped up superfast fibre installation at its broadband business. And BT's announcement last week that it intends to make 300 million pounds' worth of share repurchases both this year and next seals the stock's position as an appetizing income stock, in my opinion.

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