Investment View: Time to cash in those BT shares as competition gets sharper

BT. Price : 210.9P. OUR VIEW: Take profits
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The Independent Online

BT is still "the major provider of telecommunications networks and services in the UK", as it is very keen to point out.

But it is facing more competition these days, and Vodafone's acquisition of Cable & Wireless Worldwide, announced yesterday, further sharpens that. Many customers will feel that is no bad thing. It isn't all that difficult to find people with horror stories about BT's customer service.

This is relevant to investors in that if too many of those customers let their fingers do the walking (it's an old Yellow Pages ad slogan) with the aim of leaving BT, revenues and profits will eventually suffer.

What helps BT is that many of its rivals in the provision of services such as broadband and fixed-line telephony aren't much good at looking after the people who buy services from them either. As a result, some of BT's customers might be persuaded back if they simply consider it the best of a bad bunch.

Notwithstanding all this, way back at the end of 2010 when this column last looked at BT, the company's shares looked to be as cheap as chips at 161.9p. There was no question that they were a buy at that level.

Is that still the case, though?

One of the main issues highlighted then was BT's pension scheme. As a formerly state-owned business the company continues to have vast pension obligations.

Last month, having been tweaking the scheme for the past few years, it finally seemed to grasp this particular nettle, when it pumped in £2bn in to wipe out nearly half of what was a lower than expected funding deficit.

This is a huge deal. Big pension obligations and especially deficits should serve as an amber warning light to any investor. They can easily bite, and companies which fail to make efforts to deal with the risk they pose are often best avoided.

The hope is that BT's move will lead to lower yearly contributions into the pension fund and provide it with the freedom to share the benefits with shareholders in the form of an immediate hike to the dividend.

Some analysts, however, have cautioned against an overly optimistic stance on this front. They feel that BT may instead take a more cautious approach. And on this they may very well be right.

That actually might not be such a bad thing. In the current climate prudence pays, and a consistent and sustainable increase in the dividend payout over time as opposed to a one-off boost shouldn't be knocked.

Improving the company's creditworthiness with the extra capital that has been freed up by dealing with the pension scheme will help BT long term by reducing borrowing costs and strengthening its balance sheet.

A more pressing concern is whether the group's aim of returning to revenue growth (excluding transit revenues) is at risk because of changes to regulations that might impair its wholesale business, Openreach. That remains to be seen.

On the other hand, despite its reputation for poor service, and some truly cringeworthy ads, BT is hoovering up a high share of the broadband business and is busily rolling out more cable. Global Services isn't making money, but costs continue to be squeezed across the business.

On valuation grounds, BT is no longer wildly cheap on 9.3 times forecast earnings with a prospective yield of 4 per cent (which might rise, but only a bit).

Although the company's actions over its pension fund are praiseworthy, much now depends on its ability to pull off that return to revenue growth. Any slight slip-up, with the shares at a fairly high level, will be seized upon by the market.

While there are grounds for holding on, I don't see much in the way of a catalyst to push the shares higher in the next few months. Those looking for yield and a stock offering defensive qualities would be better off with the aforementioned Vodafone.

As such, those who bought in at just over 160p when we last looked can feel comfortable with taking some profits now.