BT (LSE: BT-A), SKY (LSE: SKY) Talktalk Telecom (LSE: TALK) and KCOM (LSE: KCOM) are all defensive telecoms plays with a decent dividend yield.
This makes them perfect additions to almost any portfolio. But each company has its own key advantages and disadvantages, and which firm you chose is down to your own personal investment preference.
Size is key
BT’s main advantage is the company’s size. It would be hard for BT to disappear overnight, as the company is an essential part of the UK’s telecommunication infrastructure.
However, there is one thing that’s holding the company back — BT’s debt, specifically the company’s pension deficit, is one of the largest in the UK.
BT’s pension deficit currently stands at around £7bn. The telecoms giant has committed itself to £2bn in scheme funding payments over the next three years. The company has a 16-year deficit reduction plan in place, but cash commitments to the scheme will hold back shareholder returns.
Still, the company’s dividend yield of 3.2% looks safe for the time being. The payout is covered two-and-a-half times by earnings per share.
Fending off the competition
SKY’s key advantage is also size. Moreover, the company’s purchase of exclusive rights to broadcast sports events, like the £4.2bn deal to broadcast the Premier League for three seasons, will pull customers towards the group.
That being said, Sky’s dominance is being threatened by low-cost online streaming companies like Netflix. Sky will need to show that it can hold its own against these companies during the next few years.
For the time being, however, Sky seems to be fending off the competition. Revenue has grown by a third since 2010 and sales are expected to expand a further 50% by 2016.
Sky’s dividend yield currently stands at 3.1% and the payout is covered 1.7 times by earnings per share.
Small and mighty
Unlike Sky and BT, Talktalk Telecom doesn’t have the key advantage of size on its side. Luckily, this hasn’t hampered the company’s ambitions.
According to current forecasts, at the end of this year, Talktalk’s pre-tax profit will have tripled since 2011. Excluding exceptional costs, Talktalk’s statutory profit after tax jumped 157.1% year on year last year to £72m.
Current figures suggest that Talktalk’s pre-tax profit will jump 59% next year. After that, management believes that the company’s sales will settle into a long-term growth rate of 5% per annum.
Talktalk currently supports a dividend yield of 3.6% and trades at a forward P/E of 25.9. The payout is set to rise around 10% per annum for the next three years.
Income pick
KCOM’s greatest strength is the company’s cash generation, and most of this cash is returned to investors. At present, the company supports a dividend yield of 5.5%.
Unfortunately, while KCOM is an income champion, the company’s growth leaves much to be desired. Revenue has fallen by 13% during the past five years, although pre-tax profit has increased by 49%. KCOM has expanded into the higher-margin telecoms services market.
Nevertheless, next year analysts believe that KCOM’s yield will hit 6.0%. The payout is currently covered one-and-a-half times by earnings per share.
