COMMENT
My Next Share

By David Kuo (TMFDragon)
January 23, 2006

Having recently sold my shares in British Airways (LSE: BAY), I have been looking around for a new home for my money. One company that has been on my radar for some time is telephone directories outfit Yell Group (LSE: YELL), and below I reveal why I have decided to make it my next share purchase.

Yell, which was formerly part of BT Group (LSE: BT.A), is a big player in the telephone directories market in both the US and the UK. In the UK it owns the dominant telephone directory Yellow Pages, with Thomson Local playing second fiddle. Together the two companies control around 90% of the market. Yell also runs the Yell.com online classified directory, and the phone-based directory enquiries service Yellow Pages 118 247.

In the US, Yell is the biggest independent provider of classified advertising. Its services include Yellow Book and the Yellowbook.com online classified directory. It is also seen as a major consolidator in the fragmented US directories market. Its recent acquisition of Transwestern for £460m is one example of its forceful acquisition strategy, which has resulted in it capturing market share from regional telecom companies.

What has struck me about Yell over the last few years is its ability to grow top-line sales aggressively. From 2001 to 2005, turnover rose some 66%, which equates to a compound annual rise of 14%. Revenue in 2006 is expected to rise 22% to £1,561m, and another 11% improvement to £1,734m has been pencilled in for 2007.

Reassuringly, profit growth has largely followed sales growth, with profits improving from £185m in 2001 to £289m in 2005. Profits are expected to increase 15% this year to £334m, plus another 15% in 2007. Yell also pays out a high proportion of its profits to shareholders as dividends. Consequently, shareholders have seen their dividend payouts lifted in tandem with rising profits in recent years.

Of course, investing in Yell is not entirely risk free. For starters, Yell's UK business is regulated, which means it can't raise advertising rates at will. In fact it has been told by regulators to cut advertising rates by 6% below the rate of inflation. Additionally, the Office of Fair Trading has concluded that the telephone directories market in the UK is not working properly. Therefore, it has referred it to the Competition Commission, and a preliminary report is due shortly.

That said Yell does not look expensive, and a punt on a positive outcome to the Competition Commission's enquiry may be justified. At 529p, its shares are valued at 14 times forward earnings, which seems fair for a business that is expected to grow profits at 15%. What's more, the shares are currently yielding 3.3%. Interestingly, Yell may now decide to curb its urge to make major acquisitions while it digests its Transwestern purchase, and that may mean a hike in dividends.

David owns shares in BT Group.

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