Telecoms is one of those enviable businesses that has a mature segment of proven companies raking in the cash and paying decent dividends, while still having great expansion potential with plenty of opportunities for smaller companies. But with BT Group offering a very average-looking yield of 3% and Vodafones mooted 5.3% yield nowhere near covered by forecast earnings and not at all safe, where can we find decent telecoms dividends?
TalkTalk Telecom (LSE: TALK) must be a candidate, with its forecast dividend of 16p suggesting a yield of 6.8% for the year ending March 2013. Its true that would not be covered by earnings predictions for this year, which come in at 12.4p per share, but a strongly rising EPS forecast for the following year coupled with a penny fall in the prospective dividend to 15p (but still yielding 6.3%) would turn that into a modest 1.2 times cover.
And with the shares currently trading around 215p after a collapse triggered by the firms recent data security breach, were looking at a 2017 P/E of under 14 with two years of very strong growth expected to follow from a 21% rise last year. And the hack proved far less dangerous than people initially feared.
Is this a great future cash cow that can be bought at a knockdown price today? It just might be.
From tiny acorns
Telecom Plus (LSE: TEP) is a company Ive been following for years. It trades as the Utility Warehouse, and bundles phone and broadband together with gas and electricity, and it has a rare strategy of engaging its customers as word-of-mouth promotional agents while refusing to spend vast amounts of shareholders money on expensive advertising.
The shares got a little overheated in typical growth fashion, and reached close to 20 in early 2014. But after what I see as a sensible correction, you can get them for around 10.15 apiece now, providing a forward P/E of 19 for the current year falling to 17 the year after, still with decent growth on the cards. The key thing for me is that Telecom Pluss business model means it can convert the bulk of its earnings into dividends, and there are yields of 4.3% and 4.7% penciled in for this year and next.
Those are not top yields right now, but they represent rises of 15% and 11% respectively and that kind of dividend growth, if continued, means you could lock in very attractive future yields on your purchase price today.
An old hand
Then I turn to KCOM Group (LSE: KCOM). As Kingston Communications it was the private exception to BTs monopoly in the old days, and I still fondly remember its famous cream-coloured phone boxes when the rest of the country was red. Over the past five years KCOM has been doing pretty well, growing its earnings and continuing with its progressive dividend policy.
And in that time the shares have gained 80%, to 105p, while the FTSE 100 has managed a less-than-magnificent 1.4%! Yet that still leaves us with a forward P/E of 13, a bit below the FTSE long-term average of around 14, but with dividend yields of around 6% (approximately twice the FTSE average). Cash flow is perhaps a little erratic, but long term it looks good enough to sustain those dividends.
Investment strategies come and go, but over the long term it really is hard to beat the idea of putting your money into top dividend-paying companies with progressive cash-handout policies, which have the potential to lift your income year after year. Our newest report, A Top Income Share From The Motley Fool, reveals a company that might just fit that bill.
It’s a company with a market cap of around 500m, so it’s not a high-risk tiddler, and dividends have been growing very strongly over the past few years.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended KCOM Group. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.