Image source: BT Group plc
Over the past year, the BT (LSE:BT.A) share price has rocketed 25% higher. It hit 52-week highs in April, and at 166p it’s not far away from jumping further still. For some investors, 200p is the next big level to try and reach before the end of this year. Here are a few reasons why this might not be a crazy idea.
The experts agree
Some large institutions have a positive outlook on the company. For example, the target 12-month share price from the HSBC team is 220p, and Morgan Stanley is targeting 225p. This kind of backing from the experts is a good sign.
Of course, the analysts’ views are still subjective. It doesn’t mean for sure that the stock is going to trade to 200p and beyond. Other banks and brokers might have a different view.
The research teams spend a lot of time investigating a company before making a recommendation though. So, it’s certainly one tick in the box when it comes to BT’s direction of travel in the coming year. Put another way, it certainly doesn’t hurt to have this kind of outlook being shared by those in the City.
Operational improvements
BT has been implementing cost-cutting strategies and improving operational efficiency. For example, even though revenue was down 3% in the latest quarter, adjusted EBITDA rose by 4% to £2.1bn due to the focus on costs. For reference, the fall in revenue was attributed to “continued challenging non-UK trading conditions”.
I think the drive can continue, which should enable profits to rise further. At the moment, the price-to-earnings (P/E) ratio is 8.98. I use 10 as a benchmark for a fairly valued stock. So let’s assume that BT can grow profit this year around 4% a quarter, and that the P/E ratio rises to 10. Factoring in the earnings per share, this would put the share price at 207p.
I don’t think this is unreasonable to conclude, given the current trajectory. Of course, one risk to the view is if cost-cutting goes too deep too soon, stunting growth and the ability of BT to maintain good customer service. This could negatively impact long-term share price performance.
Added income benefit
When I think about the 20% potential move higher in BT shares to hit 200p, I believe it makes it a good idea for investors to consider. Yet even if the stock doesn’t reach 200p, investors will still be able to enjoy the generous dividend yield of 4.82%. To some extent, this makes it an attractive option for both dividend and growth potential.
Or let’s say it doesn’t reach 200p for another couple of years. In the process of waiting, we can pick up the income, which can then be used to buy more BT stock or invest elsewhere.
