BT Group is classic value stock: Would Warren Buffett Invest in it?

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on Feb 9, 2023
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  • BT Group is seen by many as a quality blue-chip company.
  • BT share price has dropped by 30% from its 2022 peak.
  • We look at several factors to determine whether Buffett would invest in it.

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BT Group (LON: BT.A) share price has made a strong comeback in 2023 as UK stocks continue recovering. The shares jumped to a high of 139.55p on Wednesday, which was ~30% above its lowest point in 2022. It remains about 30% below the highest level in 2022. So, would Warren Buffet invest in BT Group?

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BT is a classic value stock

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Warren Buffett is a disciple of Benjamin Graham, the writer of the Intelligent Investor. This makes him a value-focused investor, who often ignores quality growth companies. By avoiding companies like Google and Tesla, Buffett missed some of the top spectacular rallies in Wall Street.

Either way, he has done well for himself and his investors, with Berkshire Hathaway being the 6th biggest company in the world with a market cap of near $700 billion. Buffett mostly invests in American companies, though he owns several foreign companies like Itochu, Diageo, StoneCo, and Nu Holdings.

So, in this article, I will look at whether Warren Buffett would invest in BT Group, which some analysts believe is undervalued. Precisely, I will look at it from the lens of Benjamin Graham, who identified seven criteria to invest in companies. 

First, Buffett likes to invest in companies like Coca-Cola, Visa, and Moody’s that have a moat in their industries. BT has a strong market share in the UK although competition fron the likes of Vodafone and TalkTalk is rising. The company wins in Openreach, which has over 820k customers. Therefore, using this metric alone, I think that Buffett would buy the stock.

Second, balance sheet is an important part of a good value company. In this regard, Buffett likes investing in companies with a debt to current ratio of less than 1.10. BT has $9.2 billion in current assets and $24 billion in total debt, giving it a ratio of 2.60. As such, in this regard, he would not invest in BT Group.

Warren Buffett other criteria

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Third, Warren Buffett likes to invest in companies with a current ratio of above 1.5. Current ratio is calculated by dividing current assets and current liabilities. In this case, BT has a current ratio of 0.89. Again, based on this metric, he would not invest in BT.

Fourth, valuation is an important metric when investing in value stocks. In this regard, Graham recommended buying companies with a PE ratio of 9 or less. BT has a trailing PE multiple of 8.41, meaning it passes Buffett’s taste. 

Fifth, the other criterion for Warren Buffett stock is positive earnings per share (EPS) growth for five years. BT does not pass this test. Its basic EPS was $0.29 in 2018 followed by $0.29 in 2019, $0.22 in 2020, $0.20 in 2021, and $0.17 in 2022.

Sixth, according to Benjamin Graham, one should invest in a company with a price-to-book ratio of less than 1.2. BT passes this test with its P/B ratio of 0.85. Finally, look for companies with quality dividend growth. The company suspended its dividend in 2020 to invest in 5G and broadband. Therefore, it failed this test as well since other similar companies have maintained their payouts.

Therefore, in this case, we see that BT Group meets four criteria set by Graham. But it also misses core parts like its dividend history, earnings growth, and balance sheet. As such, I think Warren Buffett would not invest in BT Group. Of course, Warren Buffett has broken his rules in the past by investing in unprofitable companies like Nu Holdings and StoneCo.

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