LONDON — The FTSE 100 (INDEXFTSE:UKX) has risen by nearly 20% over the last six months, and many top shares are beginning to look quite expensive.
I’m on the hunt for companies that still look cheap, based on their long-term earnings potential. To help me hunt down these bargains, I’m using a special version of the price to earnings ratio called the PE10, which is one of my favorite tools for value investing.
The PE10 compares the current share price with average earnings per share for the last ten years. This smoothes out any short-term volatility and lets you see whether a company looks cheap compared to its long-term earnings.
Today, I’m going to take a look at the PE10 for BT Group plc (ADR) (NYSE:BT). The company’s share price recently hit six-year highs after it beat forecasts with its latest results, so is there any value left in the stock?
Is BT Group a buy?
BT Group plc (ADR) (NYSE:BT) is currently investing heavily in expanding its fiber broadband network and developing a pay television service — two complementary services it hopes will attract customers from British Sky Broadcasting Group plc (LON:BSY) and Virgin Media Inc. (NASDAQ:VMED).
After a rocky few years, BT’s profitability and cash flow are improving, and the firm raised its dividend by 14% to 9.5 pence for the full year.
Is now a good time to buy BT Group plc (ADR) (NYSE:BT)?
BT’s current P/E of 12.5 looks quite modest and is quite an attractive valuation. However, the company’s PE10 of 16.8 suggests that based on its historical average earnings, BT shares are quite fully priced. Its dividend yield of 3% is only average, too.
While I wouldn’t rule out buying BT Group plc (ADR) (NYSE:BT) shares at their current price, I don’t think they are cheap, either.
In my view, BT is currently a hold.
One potential risk of investing in BT is the company’s 4.5 billion pound pension deficit.
Although it is unlikely to threaten BT Group plc (ADR) (NYSE:BT)’s survival, it could threaten its dividend growth, as last year’s pension deficit payment of 325 million pounds was nearly half the 750 million pounds it spent on dividends.
BT is pinning its future growth hopes on becoming a “quad play” operator, offering a combined broadband, telephone, television, and mobile service to its customers.
Although the quad-play goal looks attractive and could drive substantial growth, there are a lot of potential hurdles. BT Group plc (ADR) (NYSE:BT)’s television service launches in August, which may be the first test of its new strategy.
Can you beat the market?
If you already own shares in BT, then I’d strongly recommend that you take a look at this special Motley Fool report. Newly updated for 2013, it contains details of top U.K. fund manager Neil Woodford’s eight largest holdings.
Woodford’s track record is impressive: if you’d invested 10,000 pounds into his High Income fund in 1988, it would have been worth 193,000 pounds at the end of 2012 — a 1,830% increase!
The article This P/E Suggests BT Group Is a Hold originally appeared on Fool.com is written by Roland Head.
Roland Head has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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