UBS says that BT Group must "halve dividend" as debt increases and cash flow decreases.

According to a warning from UBS, BT Group is under pressure to increase its free cash flow, which raises the possibility that it might be forced to halve its dividend.

The impact of rising interest rates and accounting adjustments at BT Sport, according to Swiss bank experts, have been understated by the market.

Although "not widely understood" or included in consensus forecasts, the accounting changes caused by spinning out BT Sport into a joint venture with Warner Bros Discovery are expected to reduce cash flow by £200 million annually because the costs are now classified as financing activities/investment in associates rather than group working capital.

Analysts forecast that BT would need to borrow at least £900 million annually for the next three years if a dividend cut is not made.

When interest rates are rising, borrowing to pay for both the dividend and pension shortfall payments "presents risks," they continued.

The dividend is anticipated to be cut in half, from 7.7p to 3.85p. Due to this, UBS also lowered its price objective from 146p to 120p and changed its rating on the shares from "neutral" to "sell."

BT announced 55,000 job losses last month as it disclosed a reduction in earnings to £1.73bn and paid a 5.39p final dividend in order to "digitise the way we work and simplify our structure." At £18.9 billion, net debt increased by £850 million to close the year.

UBS believe that increasing promotional expenditure might negate the benefits of the Consumer division's recent 14.4% price increases, while Openreach's line loss is "getting worse" and putting pressure on wholesale prices.

With a general election anticipated for the UK next year and Labour now ahead in the polls, UBS also warned BT about the prospect of a possible change of government.

(Sources: investing.com, reuters.com, proactiveinvestors.co.uk)