MARKET REPORT: Broker puts BT on hold over fears for dividend as £1bn is earmarked for the firm’s pension deficit
There’s a £1billion question hanging over the future of BT, which has prompted a leading City broker to downgrade shares in the telecoms giant.
Analysts at Berenberg, whose research appears to go down well with fund managers, have raised concerns over the sustainability of the dividend.
The phone lines and broadband giant generates around £2.5billion in free cash, giving it more than enough to support its current payout, which cost around £1.5billion last year.
Payout concerns: Leading City broker Berenberg has downgraded shares in telecoms giant BT amid fears for the sustainability of the dividend
The tranche left – £1billion – is earmarked to support the hefty BT pension deficit, to buy mobile phone spectrum, and buy back employee share options.
That doesn’t leave a lot of headroom for new boss Philip Jansen if he wants to invest in the business. Put another way, the dividend could come under pressure if he wants to push the boat out.
The prospective yield on BT shares is around 6.8 per cent, which makes it a staple of funds and portfolios of private investors seeking a reliable income stream.
The BT board has committed to a 15.4p dividend for the current financial year and next.
‘We believe that Mr Jansen may signal that, given the strategic importance and growth created by fibre-to-the-premise, he will prioritise investment and signal a cut to the dividend from 2020/21,’ said Berenberg.
Stock Watch – Kosmos Energy
Shares in the oil and gas explorer Kosmos Energy have had a bumpy ride over the last year.
The company’s key assets are mainly focused off the coast of West Africa near Ghana, Equatorial Guinea, Mauritania and Senegal, although it also has production operations in the Gulf of Mexico.
Shares were up 0.6 per cent, or 2.75p, to 477p, after the firm announced its first-ever dividend, and full-year revenue growth of around 30 per cent.
It is forecasting a 30 per cent reduction to 10.8p and also downgraded its stance on the shares to ‘hold’, with a 260p share price target. BT shares fell 3.3 per cent, or 7.4p, to 220p yesterday.
Turning to the mining sector, Fresnillo achieved record annual silver production of 61.8m ounces in 2018 as well as gold production of 923,000 ounces, but it wasn’t enough to placate an unforgiving market, which expected more – the company had hoped to hit 65m ounces of silver.
Shares in the Mexico-focused firm fell 8.3 per cent, or 81.4p, to 894.6p.
The FTSE 100 slumped 32.62 points, or 1 per cent, to 7151.12 after the pound surged on news that Theresa May would offer MPs a vote on ruling out a no-deal Brexit and extending the UK’s departure date past March 29.
City Index analyst Ken Odeluga said sterling’s boost demonstrated the market was convinced a softer Brexit is on firmer ground but warned that there could be an ‘overestimation of momentum and perhaps an underestimation of remaining risks’.
‘A delayed Brexit does not equal a cancelled Brexit,’ he added.
A big slider in the blue-chips was British Airways and Iberia owner IAG, down 4.3 per cent, or 28p, to 617p after stock market data provider MSCI announced plans to delete it from its Spanish Ibex 35 index.
It is understood to be because of a cap on the ownership of shares by non-EU persons, which came into force ahead of Brexit.
There was better news lower down in the FTSE 250 as property investor Derwent London hiked its dividend by 10 per cent after achieving earnings growth in 2018 despite ongoing uncertainty in the London office market, sending shares up 0.8 per cent, or 25p, to 3288p.
Among the small caps, Springfield Properties rose 2.9 per cent, or 3.5p, to 124.5p after an 38 per cent rise in first-half revenue.
Remote tracking specialist Starcom was also shining after a new range of electric motorcycles using its Helios technology was launched, lifting shares up 7.1 per cent, or 0.1p to 1.5p.
But there were headaches for gas firm Serinus Energy, which sank 2p, or 13.1 per cent, to 13.25p after equipment for a project in Romania was missing components and was not set up properly.