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The former state-owned monopoly inherited a dominant market position in fixed-line telecoms, a declining product. It still has over 50% market share, but also a regulatory requirement to offer its network to competitors.
In the last five years two themes have prevailed:
- Increasing margins in the face of declining revenues, achieved through cost cutting and turnaround of an ill-fated global move into managed IT networks for companies.
- Expansion into bundled broadband and pay TV services.
BT has spent 2.5 billion pounds rolling out fiber-optic broadband nationwide, playing catch-up with Virgin Media, and 1 billion pounds aggressively competing with BSkyB on price and content , taking a leaf from Rupert Murdoch's book to use sports broadcasting as a loss-leader.
Revenues have declined consistently since 2009/10. Nevertheless, increasing margins have generated rising operating profit and EPS, enabling BT to pay an increasing dividend with cover comfortably over two-times.
Ian Livingston, CEO since 2008, takes credit for the turnaround and new strategy. He is stepping down to become U.K. trade minister.
Retail head Gavin Patterson has been groomed to replace him. His marketing background chimes with BT's new activities but may risk a slackening of financial discipline compared to accountant Livingston, I presume. However, the long-serving finance director remains in situ.
BT has negative net assets, thanks to a 6 billion pound net pension deficit. Net debt has been brought down from 28 billion pounds in 2008 to a manageable 9 billion pounds, with interest covered a decent five times.
The gross pension liability is 47 billion pounds, nearly double BT's market cap, so changes to assumptions can cause big fluctuations. After a 2 billionpound special contribution in 2011/2, BT still has significant ongoing funding commitments.
5 billion pound a year cash flow has comfortably covered BT's fixed costs and substantial capex, allowing debt amortization and pension contributions.
The shares recently hit a six-year high as investors see BT having turned the corner. The prospective P/E of 13 and yield of 3.3% are market average. After a big dividend cut in 2009/10 the payout has risen with a 14% increase this year and 10%-15% expected by management for the next two years.
Investors have done well from BT's turnaround. The long-term thesis remains attractive, with payback from capex programs likely from 2015 onwards, but there are big risks in execution on a fiercely competitive battlefield.
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Fool contributor Tony Reading has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.