Saturday, October 22, 2005


Most investors are quite aware that BT is very cash generative but I am not convinced that all realise just how cash generative it is. Consider free cash flow. Of course estimates of true free cash flow are uncertain (to say nothing of difficult to do), so look at the more pessimistic measure of free cash flow post all capital expenditure (as opposed to just maintenance capex for a real free cash flow). BT should be able to keep this above 20p, most likely well above.

With BT’s share price currently at 221p, this implies that BT’s likely sustainable free cash flow per share (on this pessimistic measure) will be more than 10% of the current share price, and could well be over 15%.

As this is post capital expenditure, this is cash flow available to the shareholders after paying for investment in BT’s “new wave” businesses and its “21st Century” network upgrade.

It does not matter whether BT uses this money to pay dividends (it would be very surprising to see more than half go there in the short term), to by back shares (another return to investors) or to pay down debt. In either case it is money made for the shareholders and an increase in shareholder wealth.

Obviously there is a downside to this spectacular return (particular when it comes from a reasonably stable business, so not too much of it can be risk premium). Investors seem to expect that BT faces a gradual long term decline. It is certainly true that the heavily regulated fixed lines voice business faces a long slow decline. However the company has done very well so far in replacing revenues and profits from its traditional business with “new wave” business and, for the moment at least it seems likely to produce growth (albeit low growth) rather than actual decline.

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