Forget the BT share price, I’d buy this FTSE 100 stock yielding 14%

One pound coin
One pound coin

At the time of writing, the BT(LSE: BT.A) share price is trading at a forward P/E ratio of just 9.7.

For value seekers, this low ratio might look attractive at first glance. Indeed, based on this metric, shares in BT are trading at a discount of around 13% to the broader market. The stock also supports a dividend yield of 6.1%, which looks relatively safe as it’s covered 1.7 times by earnings per share (EPS).

However, I’m not convinced that BT shares offer value. So, today I’m looking at one FTSE 100 income champion that I believe would be a better addition to your portfolio.

Cash cow

BT is one of the most recognisable consumer brands in the UK, which makes it appealing from an investment perspective. The company has a highly visible presence across the country, so you know you’re buying into a real asset, not some imaginary mining concern on the other side of the world.

Still, a recognisable brand doesn’t mean the business has solid fundamentals. The main thing that concerns me about BT is its debt.

I reckon the company is one of the most indebted businesses listed in London today, with more than £13bn of net debt and a net gearing ratio — the ratio of net debt to total shareholder equity — including pension obligations of 170%. What’s more, the firm’s net debt, excluding retirement obligations, has more than doubled since 2015, rising from £5.8bn to £13.3bn.

Dividend cut

In my opinion, the best thing the company can do to get this debt under control is cut its dividend. For the financial year to the end of March, BT raised £2.4bn of debt to fund £1.5bn in dividends to investors.

In comparison, FTSE 100 peer Evraz(LSE: EVR) paid out $430m in dividends and paid off $1.1bn of debt. The company was able to do this because it’s an extremely profitable business. Free cash flow from operations for the financial year to the end of December 2017 was around $1.8bn.

City analysts believe the company’s profits will jump a staggering 115% for 2018. The bad news is, they expect a contraction next year. But overall, at the end of 2019, EPS should still be around 48% higher than the figure reported for 2017.

Debt reduction

Evraz isn’t debt free. The enterprise has higher borrowings than BT with a net gearing ratio of around 194%. But unlike BT, debt is falling, and it’s dropping rapidly. Group gearing was 3,676% in 2015. Since then, net debt has declined from $4.9bn to $3.7bn, and gearing has dropped to around 200%.

Now debt has been reduced to a sustainable level, management is focusing on returning cash to investors.

Analysts have pencilled in a total dividend per share of $0.85 for 2018, falling to $0.58 for 2019. Even at this lower level, these numbers still suggest a dividend yield of 9.6% is on the cards for 2019, after a distribution of 14% for 2018. And to add to the appeal, the shares are even cheaper than those of BT right now, changing hands for just six times forward earnings.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.