Telecom Plus (LSE: TEP) is one rock-solid passive income stock I think investors should be taking a closer look at. Here’s why!
Utilities smorgasbord
Telecom Plus owns and operates the Utility Warehouse brand. It proudly boasts being the UK’s leading multiservice utility provider. It offers a variety of services including broadband, energy, mobile, and insurance through holding one account. I know personally it can be a nightmare managing all these different utilities separately!
As I write, Telecom shares are trading for 1,640p. At this time last year, they were trading for 2,490p, which is a 34% drop over a 12-month period.
Telecom’s share price drop isn’t something I’m concerned about. I think it has been unavoidable due to market volatility. I view it as an opportunity to buy cheaper shares in a burgeoning business.
The investment case
I’m hard pressed to find many passive income stocks with such a great historic track record coupled with excellent recent performance. Although I understand past performance is not a guarantee of the future, I can’t ignore that the business has experienced yearly growth for the whole 25 years it’s been operating.
Plus, a recent update last week revealed that the business is set to double its customer base. In addition to this, its exclusive energy deal with Eon made it the cheapest supplier of energy last year. This helped boost pre-tax profit by nearly 40% for the six months ended 30 September. Furthermore, revenue soared by a whopping 57.1% and the business increased its interim dividend too. Finally, the good news kept coming with a share buyback programme to begin imminently.
Moving onto returns, Telecom hasn’t cut its dividend for 15 years! At present, a dividend yield of 5% looks well covered too. However, it’s worth remembering that dividends are never guaranteed.
Telecom’s business model is interesting. Rather than traditional marketing spend – which can be costly – it uses partners to sign up new customers. These are individual agents. Now there is a risk here for me to consider. This could present problems in the future if regulations are tightened. Many energy businesses have fallen foul of mis-selling practices in the past. Such issues could dent investor sentiment and Telecom’s performance if it were to fall foul of this issue.
Another issue is that of intense competition in the utilities sector. Many firms are vying for customers and a cost-of-living crisis could see firms undercut each other. This could impact Telecom if it were beaten on price and threaten potential payouts.
Final thoughts
Overall I reckon there’s a lot to like about Telecom Plus. A solid track record, positive recent performance, as well as the shares falling providing an attractive price point to buy some shares are some of these aspects.
A price-to-earnings ratio of 18 isn’t the lowest but I believe sometimes one must pay a good price for a quality business.
I reckon the business can provide solid dividends for those looking to boost a second income stream.
