Interactive Investor

Should you believe the hype at TalkTalk?

24th May 2018 13:17

Graeme Evans from interactive investor

For investors on the trail of a potential turnaround stock, the story doesn't get much more intriguing than TalkTalk Telecom.

Shares in this one-time high-yielder have been close to a record low, driven down by a combination of balance sheet fears and the impact of intense competition in the home broadband market.

Today's full-year results highlighted why TalkTalk has disappointed, with earnings per share (EPS) of just 1.8p leading to a cut in the dividend - as previously announced by the company in February.

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Should you chase this 8% yield?

The earnings performance has been dented by the cost of growing the customer base, with more than two million subscribers having been added to the company's fixed low price plans. There's also been the impact of spending on the infrastructure needed to deliver much higher broadband speeds.

Certainly, the investment in price looks to be paying off after the final quarter of the last financial year delivered TalkTalk's highest ever net customer adds figure of 109,000. This compared with 22,000 a year earlier.

Source: interactive investor         Past performance is not a guide to future performance

The trick now for CEO Tristia Harrison will be to maintain this growth momentum and to build a substantial base from which higher revenues and earnings will flow.

She said today: "We have returned the base to growth, laid the foundations to continue to simplify our operations and strengthened the business. We will now see the benefit of that as we move into FY19."

How this turnaround will impact on dividend prospects remains to be seen. Today's cut in the total dividend to 4p from 10.29p in 2017 certainly serves as a reminder to investors to take note of stocks in the dividend danger zone table.

Having previously yielded 6% or more, TalkTalk has told investors to expect a pay-out of just 2.5p in relation to the current financial year. A return to "a more normalised dividend policy" will only be possible once earnings growth returns and leverage is back near 2x net debt/headline EBITDA.

The reduction in the dividend, along with a £201 million equity raise and today's proposed sale of TalkTalk's direct B2B business to Daisy Group for £175 million aims to strengthen the balance sheet and reduce debt from the current 3x ratio.

In turn, that will enable TalkTalk to invest in its full fibre strategy and deliver on plans to reach three million homes and businesses through a partnership with Infracapital. Former BT executive Paul Reynolds has been appointed chairman of the company overseeing the roll-out.

Such developments represent encouraging signs, but the market appears still to need convincing. Shares lifted to 133p after the release of today's results but subsequently fell back to near to their opening mark.

With BT, Sky and Vodafone increasing competition in the home broadband market, TalkTalk management may have their work cut out to get the share price moving in the right direction again.

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    Infrastructure