BT’s pension deficit puts 5.6% dividend at risk

BT pension deficit dividend cut

BT Group (LON: BT.A) (BT.A.L) shares have endured quite a dramatic decline since early last year, falling from around 500p to just 277p today. After paying out 15.4p in dividends last year, BT’s trailing dividend yield now stands at a high 5.6%. With the FTSE 100 index yielding 2.8%, BT’s dividend yield is twice the market average.

While a 5.6% dividend yield sounds attractive, there’s one reason I won’t be adding BT Group to my dividend portfolio right now.

BT’s huge pension deficit

The main thing that deters me from my buying BT for its dividend at present, is the company’s sizeable pension deficit. According to Stockopedia, BT’s pension deficit was £9.2bn at the end of FY2017. That’s a considerable deficit, given the company’s market cap of £27bn. Indeed, late last year, analysts at MSCI declared that BT had the second worst funded pension scheme in the world! Add in long-term debt of another £10bn, and the balance sheet doesn’t look good.

Ratings agency Moody’s, which cut its outlook for BT from ‘stable’ to ‘negative’ earlier this year, warned recently that BT may need to cough up £2bn in cash in the next two years, in order to ease the concerns of the pension trustees. That kind of cash demand could have serious implications for the dividend payout, in my view.

With that in mind, I’ll be leaving BT’s 5.6% dividend yield on the table for now.

Disclosure: Edward Sheldon, CFA has no position in BT Group. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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