BT (LSE: BT.A) shares are down 17% from their 13 May one-year traded high of £2.42. Much of this followed reports the government will oppose Indian billionaire Sunil Bharti Mittal’s attempts to increase his stake in the firm.
However, this is just a transitory factor in what is now a classic short-term-risk/long-term-reward play, in my view. The telecoms giant may be the focus of a further temporary bout of political noise surrounding its ownership.
But the underlying investment case has not changed: earnings are improving, cash flow is turning, and the heavy fibre‑build phase is now past its peak.
So what long-term share price am I targeting?
What’s the ‘fair value’ of the stock?
Historically, asset prices (including shares) converge to their fair value over time. This value represents the true worth of the underlying business over the long term.
Discounted cash flow (DCF) analysis identifies where this fair value is by using forecasts of a business’s future cash flows and discounting them back to today. When those forecasts become less straightforward, the discount applied increases.
Analysts’ DCF outcomes may vary due to different assumptions used, but in my modelling — including a 9% discount rate — BT appears 34% undervalued at its current £2.03 level.
That places fair value around £3.08 — significantly higher than the present price. So, provided markets continue drifting towards fair value, this could be a great potential buying opportunity if that DCF modelling holds good.
Is this justified by the core business?
Ultimately, any firm’s long-term share price gains are powered by sustained rises in its earnings.
A risk for BT is any renewed spike in capital expenditure if network upgrade requirements change. Another is the potential for tighter regulatory oversight of broadband pricing or wholesale access. This could limit BT’s ability to expand margins even as fibre penetration improves.
Nonetheless, analysts forecast the firm’s earnings will grow by a yearly average of 11.8% to end-2029 at minimum.
A dividend bonus too?
BT also offers shareholders sizeable dividends, with the current dividend yield at 4.1%. That sits well above the present FTSE 100 average of 3.1%.
However, analysts expect these returns to rise to 4.2% next year, 4.4% in 2028, and 5% in 2029.
So, a £20,000 holding in the stock (the same as mine) would make £12,940 in dividends after 10 years and £69,355 after 30 years.
These figures are not guaranteed. They assume the forecast 5% as an average, although that could go down (or up) over time. They also factor in the dividends being reinvested into the stock to harness the power of dividend compounding.
By then, the total value of the shares (including the £20,000 stake) would be £89,355. That would deliver an annual income from dividends alone of £4,468.
My investment view
BT’s combination of strengthening earnings and cash flow makes the current valuation look a bargain to me. The shares also offer an attractive dividend stream, which adds meaningful long‑term return potential on top of any capital gains.
For investors willing to look beyond the short‑term uncertainty, BT strikes me as a long‑term value opportunity to consider.
I will certainly be buying more of the stock, and have my eye on other deeply undervalued, high-yield shares in other sectors.
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Simon Watkins owns shares in BT.
