Private Investor: I'm sorry, British Telecom, your number is up
Saturday 26 March 2005
Click, click, brrr. I've finally hung up on
Click, click, brrr. I've finally hung up on British Telecom. Having bought its shares when they were privatised and at various points in between, I know that my losses on them exceed my profits, but, just for a change, I've decided to cut my losses. I cannot think of a single reason to hold let alone buy BT shares, except for the possibility that they might, in due course, become some sort of target for someone.
The trouble is that, although the company is a shadow of its former self, it is still big, with a market capitalisation of about £17 billion, even in its current becalmed condition. So any telecoms group or other buyer seeking to pick it up would need to have a certain amount of muscle. It was all so different once upon a time.
When I sold my shares at just below 200p last week, I shuddered at the memory of the peaks they scaled in the dotcom boom - £15 or so, I seem to recall, at their peak. When they went down to £8, when the bubble peaked, I bought some more, because they looked cheap. Of course, they only looked cheap in relation to their vastly inflated levels during that boom, but then I - and others - couldn't quite see that. Foolish indeed.
For me, it all went wrong when BT floated off its mobile arm, once called Cellnet, then MMO2 and now just O2. Remember Cellnet? That really was a business with a future: mobile telephony. BT had to sell it because it had racked up so much debt, not least through what it had to pay the Government for its 3G licence for, ahem, mobile telephony.
All BT had left was the fixed-line business, a load of phone boxes, inert domestic customers, and regulators that seemed to want to unbundle it out of existence and wouldn't even let it control its own "local loop". And this is on one of the most competitive markets going, with suppliers from Tesco to Wanadoo offering broadband for next to nothing.
BT is joining the fight, we know, and is well placed to win some customers, but the attrition of its old customer base looks set to continue. It would have all been very different if it had hung on to its mobile business, in which it would have maintained a hedge against the future.
Now, I see, O2 has a market capitalisation not that far behind BT - about £11bn. Admittedly this has been pumped up by a good deal of takeover talk, but it is quite remarkable how it has turned itself around. Last week's trading statement knocked 10 per cent off the shares, I admit, but there were hopeful signs alongside forecasts of lower growth and provisions for redundancies.
First, O2 is going to invest in extra staff in customer service, which is now the main focus, as telecoms focus on customer retention rather than acquisition. Secondly, rather more significantly, the German end of the business, long a source of misery and confusion, seems to be picking up subscribers.
O2 shares trade at the equivalent of 14 times likely earnings per share for the next financial year, and give a healthy dividend yield of 2.9 per cent. Which makes them not bad value, but not as good a bet as when I bought them at about half that level after the telecoms boom collapsed. So for me, O2 is a hold rather than a buy.
So what is a buy? Well, Serco, which I wrote about a couple of weeks ago. It has a finger in virtually every public service outsourcing pie from the London Docklands Light Railway to the Leicester Royal Infirmary. Indeed, it operates in markets in Europe, the Middle East and North America. Dividend policy is progressive (up 12 per cent last year). The only worry is gearing, at 70 per cent, a result of a capital restructuring a couple of years ago, but it is long debt at reasonable rates, so it should be manageable for such a fast-growing business.
I bought at 244p. That's down from its peaks of 600p a couple of years ago but, unlike with BT, I expect it will see those heights again before too long.
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