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Talking about this weeks likely dividend cut.

9/11/2015

6 Comments

 
After last weeks shock announcement of a 50% cut in AMEC's dividend on the back of the downturn in oil services. I thought today I would talk about a likely dividend cut which may well be delivered this week. The stock concerned is TalkTalk (TALK) who are due to report an update on Wednesday and who have been in the news for all the wrong reasons given their data breach recently, although this was not the first time this has happened to them.

When I last wrote on this one back in July this year I finished up by saying "...they have continued increasing the dividend rapidly and the cover has therefore eroded to around 1x. Thus the strongly growing 4% yield seems attractive on the face of it, but it may be vulnerable to the forecast growth slowing or stopping if they don't end up delivering the growth in profits and cash flow that they are expecting. Otherwise the shares don't seem that attractive on other valuation metrics like the PE of 25x so a hold at best for yield I would say."

At the time they were suggesting the growth would be second half weighted and given the hack, the likely increased costs on the back of it and increased price competition I fear that the growth will not now be forthcoming and that dividend will now have to be cut given the debt and the limited cover. This is indicated by the score of 28 & 12 for financial security and cover on the Compound Income Scores (CIS). In addition they have already seen steady downgrades prior to this so the estimate revision score is also already very poor at just 8. Thus despite the decent yield and strong forecast growth the shares only Score 20 on the CIS overall (100 is best).

Even though the shares have already tanked on the back of the hack (see chart below) I think there could be further downside from here because profits estimates may be downgraded again and the dividend now likely to be cut or passed completely at the interim stage according to a Citigroup analyst when he said:

‘We think that TalkTalk were already slipping in customer numbers before their website was hacked. In their results next week we’re expecting TalkTalk to suspend its guidance, skip its interim dividend and provide an update on customer orders and cancellations in the wake of the security breach.’ (see this report at Thisismoney.co.uk for more details).

So it now looks like a sell to me, even down here, as a halving of the dividend to 6.9p and say a 4% yield again would suggest <180p. In terms of cash flow (for shareholders) I suppose it could be worse as if they do pass the interim and then say halve the final and following interim they'll only be looking at 4.6p or a 2% yield for this year based on Friday's price of 226p which reinforces the sell case for me, I note the shares are already off by 5% this morning in response to the press articles.

Of course I could be wrong, despite what the figures suggest and they may choose to tough it out and maintain the dividend, which would lead to a bounce and we'll only have to wait until Wednesday to find out.
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6 Comments
Mark Carter
9/11/2015 12:54:33 pm

Very interesting. The company has a lot of debt, and its returns on capital are mediocre. It seems as though analyst estimates are too oprtimistic.

It will be interesting to see what happens on Wednesday. Maybe they'll be a technical bounce, or something, but the company itself is in no great shape.

Reply
Jamie link
9/11/2015 01:40:49 pm

Hi Mark, yes it will be interesting to see what happens on Wednesday and as i think you are a Stockopedia user too - I see their algorithm only ranks it at 25 too which is pretty poor as well and the Z-Score is 0.65 too.

Regards
Jamie

Reply
Mark Carter
9/11/2015 07:08:45 pm

Yes, none of the scores are particularly good. The momentum score is appalling, and bodes ill.

A lot of debt and an earnings downgrade don't make for happy reading.

Bill link
9/11/2015 01:14:08 pm

Jamie,
Good write up in my view. I tend to agree that there is a fairly good chance that the dividend will either be temporarily passed or a cut announced to bring it back in line with an amount that can be managed from their free cash flow. Leaving apart the conventional measure of dividend cover, I always take a look at the free cash flow. The free cash flow in 2014 and 2015 was some considerable way short of being enough to pay the dividend. Also depending on the direction of revenue and profit, the directors may need to take a further look at debt.

Definitely not one for me at present; I sold my holding in early 2014. As an aside I also left TalkTalk this year. Like all telecom providers they are fine when things are going well but when you have an issue with the line, it’s that dreaded 10 questions from customer services overseas time and gain.

Reply
Jamie link
9/11/2015 01:49:05 pm

Hi Bill, thanks for your comment. Agree the cash flow cover is low and the balance sheet looks weak, although the cash flow could improve if they can cut costs and reduce cap ex. as they have suggested. I guess Wednesday may give some clarity on that.
However in previous years the pick up in earnings and cash flow kept getting deferred as they found more things to spend money but they kept on ramping up the dividend regardless. This can't go on forever and it looks like now might be the crunch time.

I am still a customer of theirs & found them OK when arranging for Open Reach to fix a problem on my line. I note however they have been pushing up their prices and are about to withdraw the speedy payment discount so their price advantage is now getting smaller.

Regards
Jamie

Reply
Cinema New Jersey link
20/2/2021 04:20:20 pm

Appreciate you blogging tthis

Reply



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