BT to cull cost base...but where will cuts fall?
LAST week we heard BT is facing significantly higher energy and inflation bills than expected.
In response, the group plans to cut an extra £500million in costs by the end of 2025, taking the total to £3billion. The move is so BT can maintain cashflow.
For now, underlying cash profits are moving in the right direction. These rose 3 per cent to £3.9billion in the first half of the year. That was driven by savings rather than strong revenue growth.
It’s never a good look to have to cull your cost base in the name of cashflow conservation. The biggest question mark is precisely where the cuts are going to come from. The wider plan for BT
involves significantly modernising and simplifying operations and product line. This includes digitising customer journeys and moving customers on to the new 5G and fibre broadband networks, which have lower running costs than older infrastructure.
The real workhorse for this is the group’s infrastructure arm Openreach which is responsible for maintaining and building the new fibre networks.
It hopes to reach 25 million homes by 2026. This technical-heavy business is unique and higher margin, and an asset to the business. However, BT will have to keep shelling out very high sums to keep itself on the cutting edge.
Another drain on cash is BT’s large pension deficit, and the latest Triennial Review makes for sobering reading. The new payment plan is going to cost hundreds of millions of pounds every year for most of the next decade. Add to that the debt pile, especially given the current higher interest rate, and the demands on cash are considerable.
We can’t rule out changes to the dividend if conditions remain very tough. The group currently offers a prospective yield of 6.2 per cent. BT has its attractions. Its mobile networks are broad and generally high quality, while Openreach is unique and higher margin.
But while BT is a strong player, it needs to leverage all of its advantages if it’s to satisfy the never-ending investment needs and return to sustained dividend growth.
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