By Chris Hughes | Bloomberg,
Investors are giving the thumbs-down to two iconic U.K. companies that are diverting cash from dividends to investment in ambitious strategic goals.
On first glance, the stock market’s aversion to BT Group Plc and BP Plc looks like a classic case of shareholder short-termism. But there’s a more worrying explanation. Investors are actually taking a long-term view, and just don’t put much value on it.
BT is the cheapest European telecoms stock when valued as a multiple of predicted earnings. It cancelled last year’s final dividend and all payouts for the current financial year. The company is facing Covid-19 impacts while having to pay down a pension deficit estimated by analysts to be around 9 billion pounds ($12 billion), not far off BT’s 11 billion-pound market value. Something had to give.
Assuming BT’s dividend resumes as guided in 2022, it will be halved. But it’s for a good cause. The cash saved will help fund a sharp increase in U.K. fiber broadband connections, something that’s billed as crucial not only to the company’s future growth and competitiveness but the U.K.’s productivity too.
Meanwhile, BP is the worst performing oil major stock since late February. It unveiled a strategic overhaul and dividend cut in August. Like BT, there’s a need to reduce debt. But the company is also aiming for one-fifth of its capital to be employed in the energy transition by 2025. Its response to the challenge of climate change goes beyond curbing investment in fossil fuels to attempting to reinvent itself as a diversified energy company.
Why the sour reaction? Neither stock price appears supported even by the lowered payouts, which should now be more reliable.
The best explanation is that investors simply don’t believe either company’s investment programs will create value. When BT has built out its network, it will still face competition from Liberty Global Plc’s Virgin Media. And there’s the risk that even if it makes good money, regulators may cap returns, or profits may be claimed by the pension plan to plug the deficit.
For BP, the question is whether its investments in renewables will mature rapidly enough to compensate for the fact that the company is not replacing oil reserves at its former rate. As analysts at UBS Group AG see it, investors are marking down BP’s terminal value: They won’t put a big number on the long-run free cash flow its new strategy will produce.
It must be frustrating for management to have a transformation story fall on deaf ears. And it’s far from clear the lack of faith among public-market investors creates a situation that will attract interest from private equity. BT’s vast pension liabilities are a deterrent to a takeover. Giant BP is indigestible. But both managements could face pressure from offers for individual assets.
That leaves companies like these trapped in a limbo zone, attractive to neither income investors nor growth investors. But if they can prove that their strategies are better than simply managing decline, the market will follow.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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