Today, we have two of our big telecoms giants going head to head with first-half results. Which is the better investment now?
In the red corner…
Shares in Vodafone Group (LSE: VOD) had lost 10% between 28 October and close of play on Monday.
But interim results provided a boost of 1.5%, to 208p, this morning, despite intense competition devastating the company’s Indian operations — newcomer Reliance Jio Infocomm is offering cut-price packages and has even offered introductory free mobile calls. As a result, Vodafone has taken a writedown of €5bn in the country.
But strengthening in Europe led to a 4.3% rise in first-half organic EBIDTA to €7.9bn, which exceeded analysts’ forecasts. The firm has narrowed its full-year EBITDA guidance to the €15.7-€16.1bn range, and suggests free cash flow of at least €4bn.
Chief executive Vittorio Colao told us that “…we expect to sustain our underlying performance in the second half of the year and remain on track to meet our full-year objectives despite macroeconomic uncertainties“.
I have little doubt that Vodafone will build upon the double-digit growth rates currently forecast for the next two years, but two things disturb me.
A dividend yield of better than 6% looks good on the face of it, but it’s only around half covered by earnings. The cash is there to pay it, but I look for dividends that actually represent sustained earnings and I have no visibility of when that will happen at Vodafone.
P/E multiples of 30 and 26 for this year and next also look too high. Vodafone shares still seem to be rated at takeover-hope levels, and that suggests precious little growth in the medium term — we’ve only seen a 15% gain over the past five years.
Profit up, shares down
It seems like only yesterday that Talktalk Telecom Group (LSE: TALK) was being pummeled by the hacking disaster, giving its already-beleaguered shares a further clobbering.
The price has been flat overall since the start of January, and had given up 46% over the past five years. And then today, on the release of first-half results, we saw a 5.8% fall to 189p, despite the company’s announcement of a more-than-doubling of operating profit to £60m (excluding exceptionals). On the same basis, pre-tax profit trebled to £46m, with basic earnings per share also trebling to 3.7p. The interim dividend is unchanged at 5.29p.
Last year’s hack lost the company around 100,000 of its customers, but attempts to reassure those who remained seem to be paying off as churn was reduced in the second quarter to 1.43% — with chief executive Dido Harding saying that “One year on from the cyber attack, we have maintained a relentless focus on looking after our existing customers“. The company’s new Fixed Low Price Plans should attract newcomers looking for best value deals too.
With Talktalk now expected to “deliver materially higher full year profits than last year” and with debt coming down nicely, how do the shares look?
We have EPS growth forecasts that would drop the P/E to 12 by March 2018, and dividends look set to yield around 7%. Again I think that’s too much cash to be handing out as it’ll only just be covered by earnings, but dividends are not as stretched as Vodafone’s.
While I see Vodafone as an undoubtedly strong long-term company, on valuation and recovery grounds, Talktalk has my vote right now.
