Investors in BT may be forced to take some short term pain after the company warned that it may be forced into cutting dividends for a period to help fund the huge investment it needs to make in rolling out its full-fibre broadband network UK-wide.
While the risk of the FTSE 100 telecom cutting its dividend to fund necessary capital investment in its infrastructure has been apparent for some time, its May dividend was held at its previous level of a £1.5 billion return to investors. That met a previous promise made by the company’s new CEO Philip Jansen to maintain the dividend at 15.4p per share until at least the end of the company’s financial year.
But Mr Jansen has now indicated that the dividend could soon be sacrificed to raise the funds that will be required to meet its commitment to customers – namely realising BT’s ‘ambition’ of connected another 15 million properties to the full-fibre broadband network by ‘the mid-2020s’.
The topic was addressed by the company’s chairman Jan du Plessis when he spoke to shareholders at BT’s annual meeting, which took place in London yesterday. He said that if ‘conditions were right’, the company would make the investment. That would involve cutting capital expenditure elsewhere, finding additional cost savings and increasing borrowing. Then came the sting in the tail:
“We will also consider reducing the dividend.”
However, Mr du Plessis did indicate that any cut would be delayed and would likely be delayed until “a year or two in the future”.
If BT does maintain its current dividend it will be, barring unexpected hikes elsewhere, the FTSE 100 index’s third biggest payer. However, crucially, rival telecom Vodafone is expected to pay a slightly better dividend. BT’s share price had already declined by around 18% this year and the 1.8% drop that followed the announcement the dividend may be in danger took that to almost 20%.
The former state sector monopoly was privatised by Margaret Thatcher through an IPO in 1984 but is still the UK’s largest telecoms group. Its infrastructure group Openreach is responsible for large swathes of Britain’s broadband infrastructure. Other units under the BT umbrella include EE, the country’s biggest mobile network operator, BT Sport, the television station and a global telecoms services business.
A restructuring process was started last year under Mr Jansen’s predecessor as BT’s CEO, Gavin Patterson. The move became necessary after an extended period of flat financial performance and pressure from industry regulator Ofcom over a lack of investment by BT in its fibre networks. An accounting scandal in Italy also proved financially damaging.