Talktalk Telecom (LSE: TALK) andVodafone (LSE: VOD) are two of the markets most defensive companies. Both companies have a steady growth outlook, trade at reasonable valuations and support attractive dividend yields, which look safe for the foreseeable future.
However, Talktalk and Vodafone have underperformed the wider market during the past three months, although this is necessarily a bad thing. Indeed, after recent declines the two companies are now cheaper than they have been at any point during the past 12months.
Growthslows
Talktalks shares have slumped by around 28% during the past three months, following managements revelation that demand for the companys services wassofter than we have seen in recent quarters, with higher promotional activity in the sector.
The high level of promotional activity is a direct result of a price war between Talktalks larger peers, Sky and BT. Unfortunately, as a consequence of this price war, Talktalks sales are already coming under pressure. The group announced back in July that second-quarter revenue only expanded3.5% year-on-year, below analysts forecasts, which were calling for growth of 6.5%.
Still, the company remains confident that it can deliver full-year revenue growth of 5%. Further, management expects revenue to grow at 5% per annum from 2017 onwards. The group is also targeting an EBITDA margin of 25% by 2017.
Additionally, City analysts believe Talktalkcan grow earnings per share by 77% this year, as actions to cut costs take effect and profit margins expand. Moreover, Talktalks earnings are expected to expand 49% during 2017.
And based on these forecasts, Talktalks shares are trading at a 2017 P/E of 12.9. The company currently supports a dividend yield of 4.6%, and the payout is set to increase by a third during the next two years. These projections indicate that Talktalks shares will support a yield of 5.9% during 2017.
Sluggish growth, hefty yield
Vodafones key strength is the companys cash flow. While growth remainselusive,Vodafones cash-generative nature hasearned its reputation as one the FTSE 100s biggest dividend payers. The company currently pays out almost all of its profits to investors via dividends.
Whats more, as Vodafones European investment programme comes to an end during the next few years, the companys free cash flow will only increase, freeing up more cash, which can be returned to investors.
Initial figures show that Vodafones multi-billion pound investment in its European telecoms infrastructure is already starting to pay off. During the first quarter of this year, Vodafones group service revenue grew 0.8%, which was better than many analysts had expected and put a stop to years of service revenue declines. Also, Vodafone reported that during the quarter customercontract churn in every market has fallen to new record lows. Additionally, full-year data traffic is now set to grow at a very healthy rate of more than 60%.
As a result of these impressive figures, some analysts are already forecasting that the company will announcesizable dividend hikes in the near future. Vodafones shares currently support a dividend yield of 4.9%.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in Sky. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.