On a number of key measurements of relative inventory worth, BT’s (LSE: BT.A) share price appears extraordinarily undervalued, I consider. The identical applies to its valuation primarily based on forecast future money flows.

Extra particularly to start with, it trades at a price-to-earnings ratio (P/E) of simply 16.5. This compares to the typical P/E of its competitor group of 19.8. Orange is at 13.1, Vodafone at 19.1, Telenor at 20, and Deutsche Telekom at 26.9.

On the price-to-book ratio (P/B), BT presently trades at 1.1 in opposition to its competitor group common of 1.6. And on the price-to-sales ratio (P/S) it’s presently at 0.7 versus a 1.2 common for its friends.

So, on every of the important thing measures BT is reasonable.

To learn the way low-cost precisely it’s in money phrases, I used a discounted money movement mannequin. This reveals BT shares to be 65% undervalued at their present price of £1.46.

So, a good worth for the inventory could be £4.17, though it could go decrease or larger than that.

Earnings progress potential

Earnings progress is essential to a inventory’s share price and dividend over time, in my expertise. Constant rises within the former will seemingly result in sustained will increase within the different two.

It’s true that BT’s full-year 1 April 2023 to 31 March 2024 outcomes confirmed income rose simply 1% yr on yr to £20.8bn. On the similar time, revenue after tax fell 55% to £855m.

Nonetheless, it is usually the case that this mirrored a heavy stage of spending (£4.88bn) on increasing its infrastructure base.

Key to me right here was CEO Allison Kirkby’s remark that the agency had handed peak capital expenditure on its full-fibre broadband rollout. She added that BT had additionally achieved its £3bn value and repair transformation programme a yr prematurely. She concluded that the corporate had reached the inflection level in its long-term technique.

In its Q1 2024/25 outcomes, adjusted earnings earlier than curiosity, taxes, depreciation, and amortisation have been up 1% yr on yr to £2.1bn. The agency added that it’s on monitor to generate normalised free money movement of round £2bn in 2027 and about £3bn by 2030.

The principle threat to all this I feel is that BT’s ongoing transformation technique falters. One other is that the cut-throat competitors within the telecoms sector squeezes BT’s revenue margins over time.

Nonetheless, because it stands, analyst forecasts are for its earnings to extend by 12.4% to the top of its fiscal yr 2027.

The high-yield bonus within the shares

BT paid a dividend final yr of 8p, giving a yield of 5.5% on its £1.46 share price.

So, £10,000 invested within the inventory would make £550 in dividends within the first yr. If these and all subsequent payouts have been used to purchase extra BT shares (generally known as ‘dividend compounding’) the returns may develop enormously.

Doing this on a mean 5.5% yield would generate £7,311 in dividends after 10 years. And after 30 years on the identical foundation, £41,874 in dividends could be made.

The whole BT funding at that time could be price £51,874. This might pay £2,853 a yr in dividends, or £238 every month!

The great yield, excessive undervaluation, and robust progress prospects are the the reason why I purchased the shares lately.