Why Talktalk Telecom Group PLC And Vodafone Group plc Are A Perfect Pair

If you’re looking for income, Vodafone (LSE: VOD) could be your best bet. The company’s dividend yield currently stands at 4.8% and this payout is set to rise in line with inflation over the next three to four years. 

However, Vodafone’s growth days are behind it. Indeed, the company has now become so big that steady earnings growth of around 5% per annum is now the norm, although as competitors eat away at Vodafone’s market share, the company is struggling to grow at all. 

On the other hand, Vodafone’s smaller peer Talktalk Telecom (LSE: TALK) is one of the market’s fastest growing companies. 

Defensive industry 

Telecoms can be considered to be one of the market’s most defensive industries, which makes it perfect for the risk-adverse investor. Defensive stocks tend to outperform during times of market turbulence and they often offer a higher dividend yield than many of their peers — something that’s extremely attractive in the current interest rate environment. 

Vodafone has all of these qualities but, as noted above, lacks growth. That’s where Talktalk comes into play. 

As a provider of telecommunications services, Talktalk has many defensive traits but the company is still growing rapidly. According to City analysts the company’s earnings per share are set to leap higher over the next three years.

Earnings growth of 44% is expected this year, followed by growth of 72% during 2016 and growth of 37% is slated for 2017. All in all, Talktalk’s earnings are set to grow 140% by 2017 — that’s growth worth paying for. 

On top of this growth, Talktalk currently supports a dividend yield of 3.4%. The payout is set to rise around 10% per annum for the next three years and on that basis, if you brought Talktalk shares today, you’d be receiving a yield of 5% by 2017. Not bad for a growth stock. 

Not cheap

Unfortunately, Talktalk isn’t cheap. Investors are willing to pay a premium to get their hands on the company’s shares.

At present, Talktalk trades at a forward P/E of 38.8, which looks expensive. However, when you factor in Talktalk’s projected growth, the company is trading at a PEG ratio of 0.9 indicating growth at a reasonable price. 

In comparison, City analysts believe that Vodafone’s earnings will only grow by around 4.7% per annum over the next three years. Overall, Vodafone’s earnings are expected to expand by 14% between now and 2017 — nothing to get excited about. 

Nevertheless, Vodafone’s defensive nature means that it’s the perfect stock to build your portfolio around. And when combined with Talktalk, the duo offers both an attractive level of income as well as the potential for capital growth.

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Rupert Hargreaves has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.