BT making the right calls

No wonder BT, when threatened with industrial action over pay in the summer, rapidly agreed a three-year deal: the telecoms company could afford it. Suddenly BT is rolling in cash and enjoying a surge in profits. As recently as May, chief executive Ian Livingston set a target of generating free cash flow of £2bn in the financial year 2012/13. Today he announced that, actually, he expects BT to achieve the figure this year and in each of the next two years. The share price, understandably, jumped 6% to 169p. That's a very long way from 74p, the low point in the dark days of March last year. Back then, the global services division – which handles IT contracts for big companies – was bleeding cash and generating a £2bn exceptional charge as a result of cost overruns; the pension fund deficit appeared enormous; and the dividend was cut. The City wondered whether Livingston, freshly installed in the top job, was being too ambitious in aiming to generate £1bn a year in cash. BT has smashed expectations in three ways. First, Livingston has delivered on his promise to halt the nosebleed in global services; the division suffered only a modest cash outflow in the second quarter. Second, the cost base has been cut by £2bn, partly by the two-year programme of 35,000 job losses and partly by making the network more reliable. Third, BT's retail division is finally punching its weight in broadband, adding a net 114,000 customers in the past quarter, a market share of 45%. In the meantime, the position of the pension fund has improved by £2.9bn with the switch to CPI-based indexation. Suddenly, BT's sums seem to work comfortably – the reduced dividend and the extra pension contribution still allow room for investment and debt-reduction. Borrowings have fallen by £1.2bn to £8.7bn in the past year. The fear remains that BT is basically an accident-prone company; investors should not relax until the £2.5bn investment in a fibre-optic network to provide super-fast broadband is earning a decent return. On the other hand, Livingston, on the evidence of the past two years, is a chief executive who under-promises and over-delivers. BT has not had many like that in the 26 years since privatisation. His caution may even have worked to the benefit of the 50,000 members (out of a workforce of 110,000) of the save-as-you-earn scheme. They got their options last year at the reduced price of 65p. At the maximum £250-a-month for five years, the profit would be almost £30,000 in spring 2014 even if the share price stands still until then. Livingston, on his executive package, won't do badly either.