BT dividend under threat as pensions face top-up
BT faces a fight to save its dividend as it prepares to reveal a £13bn funding black hole in its pension scheme.
The company will reveal the impact of its triennial pension review alongside annual results on Thursday, a move that is expected to trigger a sharp increase in top-up payments to as much as £1.1bn annually.
Chief executive Gavin Patterson will aim to soften the blow to BT’S cash flow with a strategy update to slash operating costs, including by cutting thousands of jobs and slimming down the struggling Global Services outsourcing division. The restructuring is expected to save £500m over three years.
BT has also been working on a deal to pledge assets to the pension scheme as security, to provide trustees comfort that retirements will be funded if the company hits trouble and so make the top-up payment schedule less onerous.
It had explored signing over rights to its network but it is understood alternative assets are now on the table. The change of plans could one day make a sale of its network subsidiary Openreach more simple.
Despite BT’S efforts, its policy of holding or increasing the dividend to around a million shareholders a year is viewed as being under threat.
It is under pressure from politicians and regulators to increase investment in “full fibre” broadband upgrades but has resisted, in part due to opposition from its biggest shareholder Deutsche Telekom, which faces similar lobbying in Germany.
BT’S strategy update could signal more spending over time, however, following a recent warning from Ofcom chief executive Sharon White that failure to invest in new technology could mean it is overtaken by new rivals. Barclays cut its target price on the shares last week, citing emerging competition from new full fibre wholesalers.
Analysts have struggled to predict whether a dividend cut is likely. Citi has given even odds, while Exane has forecast a 30pc cut. BT declined to comment on the issue.
There has there been a disturbance in the force. Billionaire space pioneer, time-traveller and immortal super-being Elon Musk considers himself one of the world’s great mavericks but last week his impatience with us mere mortals reached new heights. Quarterly earnings calls are a long-standing and important feature of the public markets. A company reports its latest financial figures, then executives face questions from analysts about the results. Yet Musk, it seems, has little time for such convention, arrogantly refusing to respond when quizzed about the financial health of his struggling electric carmaker Tesla.
At one point Musk interrupted, saying: “Next. Boring bonehead questions are not cool.” He then chose to field 20 minutes of questions from a 25-year-old Youtube star.
Perhaps Musk was just tired and grumpy. It can’t be easy trying to simultaneously conquer space, consign the combustion engine to history and revolutionise the speed of terrestrial travel.
Yet Musk’s tetchiness hints at a much bigger problem: that Tesla has some real issues. When the boss of a large public company, particularly one that is burning through cash at the frightening rate that Tesla is, objects to a handful of routine questions, alarm bells ring loudly. No wonder his petulant display wiped more than $4bn off Tesla’s share price.
Musk should be careful that he doesn’t attract comparisons with some of the big corporate disasters of modern times, which were presaged by bosses who dismissed those that dared to probe.
Former UK tech darling Autonomy banned analysts from attending executive presentations before it eventually imploded. And Enron boss Jeffrey Skilling was caught calling one dogged inquisitor an “a------”.
Musk is unquestionably a genuine visionary but his dismissive attitude is what makes him a hero to supporters. He recently advised Tesla employees to walk out of unproductive meetings. Like Donald Trump, his supporters lap up the insolence – the more Musk attacks his detractors, the more the fanboys cheer him on.
Still, in this instance he is wrong to lash out. Concepts like profit, capital expenditure and cash flow may seem irrelevant to an entrepreneurial wizard on a mission to upend the entire car industry, but they have proven to be pretty reliable tools when it comes to assessing a company’s long-term prospects. His reticence to answer some fairly basic questions suggest the great Tesla experiment is under threat.
‘The more Musk attacks his detractors, the more the fanboys cheer him on’
New BT strategy a test for Patterson
BT boss Gavin Patterson arguably faces the most pivotal moment of his five-year tenure this week when it unveils a new corporate strategy.
The company is still reeling from an accounting scandal in Italy, which slammed the brakes on attempts to turn a bloated former national incumbent into a consumer-focused TV and mobile business. The share price has halved since. Patterson must now prove capable of taking the tough decisions required to drag BT into the 21st century.
Ending the company’s gold-plated pension scheme has proven deeply unpopular but the move is absolutely central to progress. Retirement benefits at BT are among the most generous in existence and are one of the reasons why staff turnover is notoriously low and the age of BT employees way above the national average.
The next step will be equally controversial. The company is also expected to announce thousands of job cuts, alongside full-year results, another move that will draw criticism. It will be the largest round of redundancies for almost a decade.
There is a strong argument that running BT is one of the toughest jobs in corporate Britain. As a state monopoly, it is subject to huge political and regulatory pressure. It must tackle powerful unions, and juggle an eye-watering pension deficit, while being one of the FTSE’S biggest dividend payers.
Yet the company finds itself thrust into the centre of the UK’S digital economy. Only weeks ago, Ofcom chief Sharon White warned that if BT doesn’t change course and invest in the future, it risks losing swathes of customers to more nimble rivals and becoming the next Kodak, Polaroid or Blockbuster.
Despite some tough setbacks, Patterson must be allowed the time to enact his turnaround.