I’m searching for the best FTSE 100 value stocks to buy for 2024. And based on current broker forecasts, BT Group‘s (LSE:BT-A) share price looks too cheap to ignore.
For the current financial year (to March 2024) the company trades on a forward price-to-earnings (P/E) ratio of just 7.1 times. On top of this, investors can grab a tasty 5.9% prospective dividend yield today.
Yet I’m not tempted to buy the telecoms titan for my portfolio. It’s my opinion that the company’s low valuation reflects the high degree of risk it poses to investors’ wealth.
Here are three reasons why I’m avoiding BT shares like the plague.
1. Regulatory wrath
The UK telecommunications sector is highly regulated and changes to Office of Communication (Ofcom) rules can have a significant impact on sector earnings.
An announcement from the regulator on Tuesday reminded investors of this constant threat. Today, it declared plans to crack down on mid-contract price hikes that have caused TV, broadband and phone costs to soar of late.
New rules to boost clarity for consumers would ban inflation-linked price increases that are expressed in percentage terms, the regulator said.
This could have significant long-term implications for BT’s earnings. This year it hiked its monthly prices by the rate of consumer price inflation (CPI) plus 3.9%. So in effect consumers were paying 14.4% more for their contracts than they were a year earlier.
The FTSE firm is already being investigated over the potential provision of poor contract information at EE and Plusnet. Ofcom has also launched a probe into service quality standards at the firm’s Openreach infrastructure unit.
Significant fines and trading restrictions are an ever-present danger for telecoms firms. And unfortunately for BT, it seems to be increasingly in the regulator’s crosshairs.
2. Sales struggles
Broadband and mobile contracts are essential commodities in everyday life. And as our lives become increasingly digitalised so will our dependence on companies like BT.
This essential service provides the sector with some stability. However, the opportunity for individual companies like this to grow earnings is weak as the UK economy struggles and consumers and businesses trim spending. Revenues at the company flatlined between April and September, at £10.4bn.
High levels of competition are intensifying for BT too, as customers shop around for a better deal. Vodafone’s planned merger with Three to continue the recent trend of industry consolidation could make things even more difficult.
3. Balance sheet woes
BT’s massive debts cast a huge cloud over its ability to fight competition. Net debt continues to climb and reached an eye-watering £19.7bn as of September.
These huge financial liabilities could limit the amount it can invest in its consumer-facing business. It may also limit the amount of cash the company has available to spend on dividends.
The stress on BT’s balance sheet looks set to keep growing too. Spending at its Openreach division will keep climbing as its fibre-laying programme continues. And the business plans to pay almost £6bn into its pension scheme by 2030 to eliminate the deficit there.
Given all of these threats, I’d rather search for other value stocks to buy today.
