I flagged this one up on Monday as looking potentially interesting ahead of today's results.
They are out this morning, as expected, so lets see how they measure up.
Just a quick heads up on a stock which Mr. Market seems to be offering up again this year, much like Christmases in the past. So if you want to treat yourself or your loved one to an alternative Christmas present then I think it might be worth checking this one out.
Today we have seen a small negative print for the latest CPI figures in the UK, although I seem to recall the RPI went negative in 2008/9 so it is not the first time we have seen this in recent years. However, personally I am not getting too worried about that becoming entrenched as you have to go back to the 1920's to 1930's to see the last real period of sustained deflation in the UK.
I would say that we could have faced a similar depression type scenario and deflation in the last few years if the authorities had not learned from history and cranked up the printing presses this time around with the various Quantitative easing measures etc. However, it does mean we are now in uncharted waters, with huge amounts of debt still outstanding and economies generally being sustained by cash being pumped out by central banks and competitive beggar thy neighbour currency depreciation.
Of course it could be that the Central Banks have just delayed the day of reckoning and the word economy and markets could eventually come crashing down under the weight of all this debt as deflation takes hold. In my view though inflation is more likely to be their chosen route to get rid of the debt over time, which they did quite successfully for a few years in the UK after the 2008/9 recession. So it remains to see if the current deflationary episode turns out to be temporary as Governor Carney suggests (although the Banks forecasting record is pretty poor) or if a deflationary debt spiral is taking hold.
No point worrying about these things too much in the short term, so I'm going to continue to invest in the least bad asset class as far as I'm concerned - equities. I believe that will be the best way to protect my capital and income from the ravages of inflation over time, although you have to be prepared to accept some volatility in your capital and income. In the long run we're all dead, but in the meantime I think a decent income producing equity portfolio should do the job for me.
If however you believed that deflation was more likely then high quality fixed income and even cash may serve you better as your purchasing power would increase against the falling prices, which might be bad for corporate profits and earnings - witness the food retailing sector recently.
Talking of corporate earnings I see we have had final results from one of the UK's major companies and dividend payer - Vodafone (VOD). They themselves continue to struggle with falling prices and the need to invest in their networks and other technologies for the future. Nevertheless they have delivered a 2% increase in the dividend this year taking it to 11.22 pence to give a yield of 4.9% at the price of 229 pence at pixel time. Within the statement they say they are also planning to increase the payment annually as a sign of their confidence in future cash flow generation, although they don't say by how much, although I see forecasts suggest another 2% or so which beats inflation at the moment. In addition this does at least compare favourably with the other major UK stocks like RD Shell and GlaxoSmithKline who have indicated flat dividends in the next few years, but then they offer yields of around 6% and 5.5% respectively.
So while Vodafone does not score well on the Compound Income Scores with a score of just 2 - I think this is probably distorted to a certain extent by some of the figures being depressed by all the restructuring and corporate changes like the Verizon demerger for example. Therefore in this case, given their position in the European mobile and fixed line markets, I would do a human over ride and suggest that it would be OK as part of a more broadly based income portfolio, but as I always say you pay your money and take your choice and you should do your own research. Or stick to a cash ISA paying 1 or 2% and see how you get on.
Aside from that they increased their dividend by their previously promised 15% to 13.8p which strangely was ahead of consensus forecast of 13.5p despite their stated intention to raise the dividend at this rate. They have promised to raise it by a further 15% again this year which will make 15.9p, in line with the consensus for next year and will leave them on a yield of around 4.4%.
Summary & Conclusion
The yield and and the promised growth remain the main attraction with this one, although you have to wonder how long they can keep raising it if the profits don't come through soon. This is especially so as the balance sheet is quite geared with debt equivalent to 2.4x EBITDA which is quite high but they do claim it will come down to less than 2x. This level of debt is probably more acceptable for a utility type business such as this. In addition as a customer of theirs I note that they are able to raise their prices quite readily without much hindrance from the regulator.
For example I just renewed my annual line rental with them for what they highlighted was a £20 saving. However last year I paid £141 as a result, whereas this year it came to £180.36 for a whopping 27.9% increase, although they are not alone in this, so much for competition and regulation! In addition my package price is due to go up by around 8% shortly and I'm sure call prices have been increasing too so they certainly seem to have pricing power.
On that basis I'm happy to run with it for the yield and dividend growth despite the apparently high rating and stretched balance sheet given the oligopolistic type features. In addition, If they do achieve their 25% EBITDA margin target in 2017 I think it could rise to around 450p by then and be on a fairer looking 14x or so which should give a fairly decent total return. However, time will tell if they actually deliver on their margin promise by then or if they find more things to spend their cash on (like Blinkbox recently). in the meantime if you don't like the shares then enjoy some music from TalkTalk the band above.
I thought I would feature a few of these for you to think about. I have written in the past about on one called Alternative Networks (AN.) (£219m market cap.) which had a trading update for the half year ended 31 March 2015 today.This read quite well giving the Board confidence that its full year expectations for the Group will be met, which is always a good start.
They did talk about a second half weighting to the profits this year, which can be a concern, but they seemed to be suggesting this was due to them winning lots of new larger contracts. Their Advanced solutions and mobile offerings did well and this helped to offset the expected decline in fixed line business. Meanwhile they are busy integrating and rationalising two recent acquisitions. On the back of this they flagged strong cash conversion and reductions in debt both actual and expected and they reiterated their 10% to 15% dividend growth expectations. The only slight negative tone was on one of the acquisitions where they said ControlCircle's performance has been satisfactory.
So with that caveat and the second half weighting to profits I guess the H1 numbers may not look that great when they are reported, but I would be confident that this one will deliver in the second half. The shares have drifted back from their highs recently and they have just bounced from an oversold position on the RSI (see chart below - comments continue after chart).
Summary & Conclusion
The shares look reasonable value on around 14x & 3.5% yield based on current forecasts to September 2015 with a Compound Income Score (CIS) of 65 . This is expected to go to 13x and 4% with the growth forecast for 2016. Seems fine to me but as I say may be the interim may not look that great so other than it being a bit oversold there may not be much of a catalyst for the price in the short term.
Otherwise there is a surprising large amount of choice in the Small Telecom company space in the UK. I have also written in the past about KCOM (£470m market cap.) which I flagged up back in January this year when it had fallen to less than 80 pence and offered a yield in excess of 6%. Just to note it has now risen towards my 100p target to reach the low 90p's but still trades on around 12x with a yield around 6%, CIS = 82
Others have mentioned to me Manx Telecom (MANX) (£200m market cap) which has reported Final results today. Not one I have looked at in detail but as the main provider in the Isle of Man I can see the attractions as it also trades on around 14x with a 5.5% yield for this year, CIS = 14 (maybe reflecting short history as it only listed recently).
Other choices in this area include the much smaller Adept Telecom (ADT) (£36m market cap.) which seems to be on around 11x with a 3% or so yield, CIS = 93. It is expected to grow strongly and favoured by former colleague John Rosier in his Investment Portfolio which you can read about here.
Finally another small one that has scored well for a while with a CIS of 96 is Maintel Holding (MAI) (£71m market cap.) which is also on around 11x but with a 4% yield and strong forecast growth although when I checked it out it didn't seem that liquid and the spread was horrendous.
So there you go plenty to choose from in this space and as I always say you pay your money and take your choice and do your own research. Puts me in mind of an old song and as 70's retro is all the rage these days look out for some classic clothes and disco dancing oh yes and Debbie Harry in this video to brighten up an otherwise dull Tuesday.