One of the worst performing stocks in the FTSE 100 over the past 12 months has been BT. Since mid-September 2017, the stock has declined 21% excluding dividends, compared to a fall of approximately 0.5% for the FTSE 100 over the same period.

After this decline, the stock looks attractive from an income perspective. The shares currently support a dividend yield of 6.6% and trade at a forward P/E of 8.9. But is this valuation low enough?

Can BT fall further?

BT is facing a tidal wave of problems, and while the company’s underlying business is still producing returns, the City is expecting growth to grind to a halt over the next two years. Indeed, according to current City figures, BT’s earnings per share (EPS) could decline by 14% during the current financial year that’s following a decline of 11% last year and 6% the year before. At the time of writing, for the financial year ending 2020, there’s no growth expected.

At the same time, I’m concerned about the sustainability of BT’s current level of dividend yield. The company’s cash flows are under pressure from all sides. It is having to spend more on its pension fund, spend more upgrading its telecommunications networks and manage a mountain of debt.

With the dividend payout currently consuming around £1.5bn of group cash flow annually, the company does not have much room for manoeuvre. Last year it generated just under £5bn in cash from operations and spent £4.8bn on capital projects. The gap between income and spending (including the dividend) was funded with debt. BT can only continue on this course for so much longer before it is forced to slash its distribution.

What’s to like about the company?

So, is there anything to like about BT? Well, the company does continue to hold a leading position in the UK’s telecommunication market which gives it a great base from which to orchestrate its restructuring. Earnings are unlikely to suddenly vanish overnight and because the group owns the majority of the UK’s telecommunications infrastructure, creditors are unlikely to pull the plug on the business anytime soon so investors don’t have to worry about BT going bankrupt.

That being said, the company’s creditors are unlikely to continue to support BT’s current dividend policy, especially with cash in such short supply. I reckon the payout is living on borrowed time, so it is probably not a good idea to buy the stock for its income.

Still, I think the market would view a dividend cut positively because it will give BT more cash to strengthen its balance sheet and re-invest back into operations, which should lead to earnings growth.

However, for the time being, the company is struggling to grow. And with this being the case, it looks to me as if the shares are fairly valued. A P/E of less than nine might appear cheap, but I reckon it accurately reflects the limited growth prospects and uncertain outlook.

Disclosure: The author owns no share mentioned.

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