Shares in Talktalk Telecom (LSE: TALK) jumped by as much as 12.5% in early trading today after the company hiked its dividend, instead of cutting it as many analysts had expected.
Talktalk’s dividend hike came alongside the company’s first-half results, which revealed that the group had suffered a pre-tax loss of £8m in the six months to September, compared to a profit of £20m in the same period last year.
However, revenue rose 5.9% year-on-year during the second quarter following a 4.7% increase for Q1. A significant increase in operating costs increased Talktalk’s cost base by £28m to £245m, and these higher costs pushed the group into a loss for the period.
Costly cyber attack
Talktalk’s first-half results struck a relatively upbeat tone, despite the “significant and sustained” cyber attack the company suffered during October.
Indeed, the company announced alongside its first-half results that the attack would cost the group £30m to £35m. However, management went on to state in the results release that the company is confident it can deliver full year results in line with market expectations.
Talktalk’s chief executive Dido Harding said:
“We have delivered H1 results in line with our plan and revenue growth accelerated strongly through the second quarter. We have a robust plan to deliver a significant step-up in profits in H2, underpinned by the benefits of our transformation programme coming through strongly.”
To help mitigate the effect of the attack, Talktalk is offering customers a free upgrade, which it hopes will convince customers to stay with the group. And to appease shareholders, Talktalk raised its interim dividend by 15% to 5.29p, up from 4.6p in the same period last year.
What’s next?
It’s difficult to interpret today’s trading update from Talktalk. On one hand, the company seems to be struggling. Costs are rising, and the full fallout from the cyber attack is not yet known.
But on the other hand, Talktalk’s management seems to believe that the company is still on track to meet full year targets. City forecasts are calling for Talktalk to report a pre-tax profit of £150m and earnings per share of 13.8p for the year ending 31 March 2016.
As it’s not yet known how much damage the hack attack has done to Talktalk’s reputation, it looks as if Talktalk’s management is setting the company up to disappoint further down the road. It seems silly for management to state that the company is on-track to meet full-year forecasts after the events of the last few months.
Time to buy
So is it time to buy Talktalk’s shares following today’s upbeat trading? It might be wise to avoid the company. Until the full effect of the cyber attack on customer numbers is known, it will be difficult to assess Talktalk’s prospects.
Moreover, the company’s shares currently trade at a forward P/E of 17.1, which seems relatively expensive for a company that’s facing such an uncertain future. And while Talktalk’s dividend yield now stands at 6.4%, dividend hunters might be better off looking elsewhere for income.
