BT Group's Dividend Sustainability: A Delicate Balance of Cash Flows and Growth Hurdles

BT Group, the UK's telecommunications giant, has long been a staple for income-focused investors, but its dividend sustainability is now facing a critical test. While recent financial results show improved cash flows and a modest dividend increase, a deeper dive into historical trends and future projections reveals both opportunities and risks. Let's dissect whether BT's dividend can endure—and whether investors should bet on its growth potential.

Cash Flow Coverage: A Fragile Foundation?

BT's operating cash flow for FY2025 rose to £7.0 billion, a 17% year-on-year increase, driven by cost-cutting and improved efficiency. Normalized free cash flow hit a record £1.6 billion, up 25% from FY2024, bolstered by reduced working capital needs and higher EBITDA. These figures are critical because they underpin BT's ability to fund dividends. The company's payout ratio—the percentage of earnings paid out as dividends—was 76% for the last declared dividend, which might seem high. However, cash flow coverage (dividend divided by free cash flow per share) is healthier, suggesting the dividend remains manageable in the short term.

Yet, BT's capital expenditure (CapEx) remains elevated at £4.9 billion in FY2025, though management expects a £1 billion reduction post-2026. This planned CapEx cut could free up cash for dividends, with mid-term targets of £2.0 billion free cash flow by FY2027 and £3.0 billion by 2030. If achieved, these improvements would significantly enhance dividend sustainability.

Historical Dividend Trends: A Mixed Track Record

BT's dividend history tells a cautionary tale. Since 2015, the dividend has declined by 4.1% annually, falling from 12.4 pence per share to 8.16 pence in 2025. Even the recent 2% increase to 8.16 pence from 8.00 pence feels modest against this long-term trend. Earnings per share (EPS) have also been in decline, dropping 9.3% annually over the past five years, though BT forecasts a 59% EPS rebound in FY2026. This projected recovery hinges on cost savings and revenue stabilization.

The dividend's yield, currently 4.3%, aligns with the telecom sector average. However, the yield's attractiveness is tempered by the stock's volatility. Investors should note that BT cut dividends entirely in 2020 due to debt pressures, a reminder that past stability isn't a guarantee of future performance.

Future Earnings Projections: Growth or Stagnation?

BT's growth ambitions center on its full-fiber network, which now covers 18 million premises, with plans to expand further. This infrastructure investment is critical: fiber broadband drives higher customer retention and premium pricing. Openreach, BT's network division, reported a 6% rise in broadband average revenue per user (ARPU) in FY2025, a positive sign. However, BT's core consumer and business segments saw revenue declines of 1% and 4%, respectively, due to pricing pressures and competition from alternative networks (Altnets).

The company's strategy to slash £930 million in annual costs and reduce its workforce by 4,000 has boosted EBITDA to £8.2 billion. Yet, these savings must offset stagnant top-line growth. BT's FY2026 outlook projects flat revenue of £20 billion, with EBITDA between £8.2 billion and £8.3 billion. While these numbers are stable, they lack the dynamism needed to fuel significant dividend growth.

Investment Considerations

Pros:
- Near-term dividend safety is supported by strong cash flows and a planned CapEx reduction.
- Fiber network expansion offers long-term growth potential.
- Cost discipline and EBITDA improvements are credible.

Cons:
- Declining dividends and EPS over the past decade raise sustainability concerns.
- Revenue headwinds in key segments and competition from Altnets could persist.
- The stock's valuation—currently trading at 14.5x forward P/E—may already price in some of these positives.

Verdict: Proceed with Caution

BT Group's dividend is sustainable in the short term, but its long-term health depends on executing its fiber rollout and cost-cutting plans flawlessly. While the 4.3% yield is tempting, income investors must weigh this against the stock's historical dividend volatility and tepid revenue growth.

Recommendation:
- Hold for now. Investors should wait for clearer signs of top-line stabilization and sustained free cash flow growth before committing to a buy.
- Avoid if you prioritize stable, high-yielding dividends; BT's inconsistent track record and uncertain growth trajectory make it a riskier choice compared to telecom peers like Vodafone or Verizon.

In conclusion, BT's dividend story is far from dead, but it's a story still in progress—one where execution on its strategic priorities will determine whether this telecom giant can deliver sustainable payouts or remain a cautionary tale of a yield trap.