BT must be more efficient

May 14, 2009

david-kuo_motley-foolthumbnail- David Kuo is director at The Motley Fool. The opinions expressed are his own.-

BT’s annual results were expected to be bad. It turns out that they weren’t just bad – they were awful.

Now, many of us were expecting massive losses, a slashing of dividends, the axing of jobs and a gaping hole in the company’s pension fund. And BT duly delivered on all fronts.

Thanks to a dreadful year from BT Global Services (which handles network services for large businesses), the company announced an annual loss of 134 million pounds after having taken a painful 1.3 billion pound write-down from that unit (a big chunk of which was due to a single IT contract with the NHS).  So they’ve taken the losses on the chin and got rid of the bosses.

Meanwhile, BT’s dividend has been at the forefront of many investors’ minds, with the company having enjoyed an enviable track record of steadily rising dividends since its crisis year of 2001. But fears were today realised with a near 60 percent cut. The full-year dividend has been slashed from last year’s 15.8 pence to just 6.5 pence.

Over in the pensions department, it’s been a dreadful year too. This past year has seen its fund reduced from a 2 billion pound net surplus last year to a 2.9 billion pound deficit this year – 2.9 billion pounds is a hefty hole to fill, and BT is planning to increase its pension fund contributions to 525 million pounds a year over the next three years.

Finally, with 15,000 jobs having already been lost in the 2008-09 year, a further 10,000 redundancies were expected to be announced for the coming year. But the jobs picture has turned out worse than that, with 15,000 now expected to go. BT hopes that most of those will go through natural wastage and voluntary redundancies, and that no compulsory redundancies will be needed.

Truth is, BT needs to improve productivity significantly if it is to compete in a global telecoms market. Currently, revenue in the global telecom sector is around 260,000 pounds for every full-time employee. But BT is some 30 percent less productive – its employees generate just 185,000 pounds per year.

Vodafone, on the other hand, boasts one of the highest levels of productivity. Its full-time workforce generates almost 500,000 pounds per employee or twice the industry average. Vodafone’s workforce also generates almost three times more revenue per worker than a comparable BT worker.

Of course BT’s low productivity is an unfortunate feature of its history as a denationalised monopoly. And although direct comparisons between, say, Vodafone and BT are difficult because one is mobile telecom business and the other fixed line, investors should nevertheless take this into account.

Private investors should consider efficiency and productivity of businesses when making long-term investment decisions. Lower productivity can translate to lower long-run returns for shareholders.

When investing in shares we tend to find that a rising tide may lift all boats, but a financial hurricane can sink many ships. BT has benefited from a rising financial tide, but its low productivity has now been found wanting.

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