Questor share tip: Buy BT Group as it plugs into improving cash flow

There have been a number of pieces of good news for telecoms behemoth BT Group over the past few weeks. Questor says buy.

BT Group
169p -5.2
Questor says BUY

The company has released an excellent set of operating figures; debt continues to fall; there has been good news on its pension deficit; and there is a chance the dividend could now offer real growth.

First, let's look at the pension deficit. The Government's recent decision that the consumer prices index (CPI), rather than retail prices index (RPI), will be used as the basis for determining the rate of inflation for the statutory revaluation and indexation of occupational pension rights is good news.

This move reduces the BT pension scheme's liabilities by about £2.9bn so, as of September 30, the company's total pensions deficit was £5.2bn, compared with £7.9bn on June 30.

This will not affect the group's deficit contributions of £525m in 2010 and 2011, but this move may reduce the amount BT has to put into the pension pot in years to come.

The group also released an excellent set of operating numbers on November 11. BT raised its full-year guidance after second-quarter profits rose more than expected as the group kept down costs and increased the number of high-speed broadband customers. BT signed up 114,000 net additional broadband customers in the quarter.

In the three months to September 30, revenues rose 2pc to £4.98bn and pre-tax profits were 48pc higher at £406m. However, pre-tax profits rose a more modest 13pc when one-off items were stripped out. The interim dividend was raised by 4pc to 2.4p a share, which will be paid on February 7. The shares trade without this payment from December 29.

Revenues are expected to be broadly flat, but the company is targeting growth in revenues starting in the year to March 2013.

The group is rolling out its high-speed broadband service as it tries to counterbalance falling revenue from its fixed-line operations.

Things are not all rosy, though. BT's campaign to grab sports viewers from Sky after a multi-year campaign appears to have got off to a slow start.

It was revealed earlier this month that the group had signed up just 50,000 subscribers to Sky Sports 1 and 2 – despite a multi-million pound advertising campaign. However, the company thinks that it will reap the benefits over the long term after it was granted permission to sell the rival operator's channels – and the subscribers who took up the sports channels represents about 10pc of the BT Vision base.

The shares were tipped as a buy on July 2 this year at 128p and are now 32pc higher compared with a FTSE 100 up 15pc over the same period. Despite the recent run, the shares are still yielding a respectable 4.4pc, rising to 4.8pc next year.

As debt is reduced, the pension hole managed and its credit rating improves, the company should be able to increase the dividend further. Indeed, the company expects to meet its target of free cash flow – the measure of cash generation that deducts expenditure and dividends – of £2bn in the current year – a full two years early. Buy.