June 8, 2018 / 10:02 AM / 4 months ago

Breakingviews - BT dividend cut would give next CEO room to invest

LONDON (Reuters Breakingviews) - Running BT is like running a gauntlet. The former UK telecoms monopoly has to appease shareholders on one side and politicians and regulators on the other. Gavin Patterson, the outgoing chief executive, managed neither during a tenure of nearly five years. His successor can make a start by cutting BT’s dividend.

Gavin Patterson, Chief Executive of BT Group, attends the World Economic Forum (WEF) annual meeting in Davos, Switzerland, January 23, 2018

Patterson’s exit is unsurprising given BT’s share price has fallen nearly 40 percent since he took over in September 2013. After including dividends, that’s equivalent to an annualised loss of 6 percent. The timing, however, is odd.

BT’s biggest problems - a hostile relationship with regulators and slow revenue growth – are longstanding, and Patterson’s new strategy makes sense. Last month he announced plans to cut 1.5 billion pounds of cost at the 20 billion pound company, and said BT would focus on using mobile signals to improve customers’ internet services. Chairman Jan du Plessis supports the plan, but wants someone else to implement it.

That suggests the board wants a steady hand rather than new ideas - the opposite of Patterson, who launched a brash soccer-rights bidding war with Sky. Simon Lowth, currently the chief financial officer, would be a logical choice since he helped Patterson forge the new plan. But the board’s statement that a new CEO would only be appointed later in the year implies they may be looking externally.

Besides implementing the strategy, the new broom’s first task will be to repair relations with regulators and politicians who want quicker rollout of superfast fibre broadband. The communications watchdog forced BT to carve out network arm Openreach to ensure fair prices for rivals who buy access to the grid. Finance Minister Philip Hammond wants 15 million fibre connections by 2025. BT has targeted just 10 million by the “mid-2020s”.

Pleasing politicians might mean cutting payouts. The company’s free cash flow after spectrum payments and one-offs will be 1 billion pounds below the cost of dividends in 2020, using Morgan Stanley estimates. Luckily, investors are already pricing in a cut. BT’s dividend yield is almost 8 percent compared with around 5 percent for Orange, Telefonica and Deutsche Telekom. BT can achieve a similar metric to its peers by cutting dividends by a third, to 10.34 pence, and give its new boss wiggle room to invest.

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