Proactive Investors - BT Group PLC (LSE:LON:BT.A) is facing pressures on its free cash flow that are creating risks that it will have to cut its dividend in half, UBS has warned.
"We think the market has underestimated the impact of rising interest rates and accounting changes at BT Sport,” analysts at the Swiss bank said.
The accounting changes results from spinning BT Sport out into a joint venture with Warner Bros Discovery are “not widely understood” or captured in consensus forecasts, but are thought likely to results in a £200mln per year hit to cash flow, as the costs are no longer recognised in the group’s working capital but are now financing activities/investment in associates.
Without a dividend cut, the analysts predict BT will have to borrow at least £900mln a year over the next three years.
Borrowing to fund both the dividend and pension deficit payments when interest rates are rising “presents risks”, they added.
Forecasting a halving of the dividend to 3.85p from 7.7p. UBS as a result also downgraded its rating on the shares to 'sell' from 'neutral' with a reduced price target of 120p from 146p.
Last month BT unveiled 55,000 job cuts to “digitise the way we work and simplify our structure” as it reported a drop in profit to £1.73bn, paying a 5.39p final dividend. Net debt rose ended the year at £18.9bn, up £850mln.
“Management is pursuing the right strategy longer-term, but near-term financials may be weaker than expected,” the UBS analysts added.
They see rising spending on promotional activity could offset the benefit of the 14.4% price rises recently made by the Consumer division, while line loss for Openreach is “getting worse” and putting pressure on wholesale pricing.
UBS also raised the threat to BT of the potential change in UK government, with a general election expected next year and Labour, who are leading in the polls, indicating they will remove mid-contract price rises and indexation at Openreach.