Why Even A 10% Dividend Hike Couldn’t Stem The Decline In BT Group plc (BT.A) Shares

After plummeting nearly 20% in a single trading session back in January on announcing huge losses related to accounting misconduct in Italy, shares of telecommunications giant BT Group PLC (LON:BT.A) plunged almost 4% this Thursday as it reported a 49% drop in EPS for the fiscal fourth quarter ended Mar’17.

Some really big one-offs

Excluding one-offs and the impact of mobile network operator EE’s acquisition, EBITDA (a measure of core earnings) fell 4.6% for the quarter and 2.9% for the full-year, indicating tough operating environment in “the UK public sector and international corporate markets”. Despite help from the acquisition, the company’s pre-tax profit for the year and the fourth quarter dropped 19% and 48%, respectively, as it faced a multitude of one-off charges.
LSE:BT.A BT Group Past and Future Earnings by Simply Wall St
LSE:BT.A BT Group Past and Future Earnings by Simply Wall St
Ofcom — British telecom regulator — slammed a £42 million fine on the company’s network infrastructure arm Openreach on breaching contracts with rival telecoms, who will also receive a nearly £300 million compensation from BT due to the same. Its management’s overstatement of Italian business earnings led to a £268 million downward adjustment for prior years and a £245 million charge in the latest fiscal, in addition to another £15 million spent on investigation in the fourth quarter.

BT raised dividends and announced overhaul, but also a dim outlook

“We take these issues extremely seriously and are putting in place new measures, controls and people to prevent them happening again, said CEO Gavin Patterson, citing Ofcom’s penalty on Openreach and misrepresentation of earnings in the company’s Italian business. In the aftermath of the Italian accounting scandal, BT has replaced its Global Services CEO Luis Alvarez with Bass Burger, while also announcing a two-year restructuring “to create a simpler and leaner operating model”. CEO Patterson and departing Group Finance director Tony Chanmugam wouldn’t receive a bonus and the company announced 4,000 layoffs to accelerate its cost transformation program. On a positive note, BT said it hit £150 million in annual synergies through the EE acquisition, ahead of expected £100 million. Although shareholders will receive a 10% higher final dividend of 10.55p, future dividend growth outlook has been reduced below previously forecasted 10%. BT is now expecting a flat revenue growth in the year ahead along with a significantly revised-down EBITDA of £7.5–£7.6 billion for FY’18. BT is in a tough spot with the risk of further write-downs related to Italian business. But its near term free cash flow outlook remains upbeat, making the 4.6% dividend yield look sustainable — something a big chunk of its income-oriented shareholders would find comforting. Find out large-caps with upbeat growth outlook in Large-Cap High Growth