Is Telecom Plus PLC A Better Buy Than BT Group plc?

A few years ago, Telecom Plus (LSE: TEP) was the must-have telecoms stock. In fact, it was more than that. Trading as the Utilities Warehouse, the company bundles telecoms together with electricity and gas, offering members’ discounts and relying on satisfied customers to spread the word rather than spend millions on advertising.

Classic growth story

And it worked. Earnings rose year after year, healthy dividends were paid… and the share price soared. In fact, in the five years to January 2014, the shares five-bagged and came close to a price of £20. But we know what happens to popular growth shares almost every time, don’t we?

Yes, the shares get pushed to high P/E ratings — Telecom Plus shares were on a forward P/E of nearly 40 at their peak — and as soon as growth starts to slow, the bandwagon is abandoned and the price slumps. Today, at 829p, the shares have lost more than half their peak value. So with full-year results coming our way on 23 June, are they worth buying now? Or should we stick with stalwarts like BT (LSE: BT-A)(NYSE: BT.US)?

Is bigger better?

BT’s recovery has been strong, with it shares gaining 230% over the past five years to 446p, as the firm has recovered from its pension fund crisis and had grown its earnings every year in that period — BT’s moves into content delivery have been impressively successful, and it’s pulled off a few prime sports coups along the way.

The next couple of years should be flat, earnings-wise, but we’re still looking at P/E ratios of around 14 with dividend yields expected to rise to 3.5% by March 2017 with cover at about two times. On those grounds, BT is still looking like a good long-term investment to me.

But Telecom Plus looks even better. Although profit growth is expected to be “significantly below market expectations” this year, as the company revealed in its April trading update, I can’t help thinking we could be poised for a second growth spurt.

Customer number growth is 11% up, with service numbers up around 10%. The full-year dividend should be up by 14% to 40p per share, and though slower profit growth is expected for 2016, the firm is still predicting a further 15% rise in the dividend to 46p.

Grab those dividends

That would give us a dividend yield of a very tasty 5.6% in 2016, with current forecasts suggesting 6.3% a year later. That’s made possible by the Utilities Warehouse multi-utility offerings, and it doesn’t need much more dividend cover than the likes of Centrica and National Grid.

And to get that level of income, we’re only being asked to stump up for shares valued on a P/E multiple of 15.5 for this year, dropping to 13 by 2017, with earnings growth predicted to start rising again. Sound good? It does to me — my eyes will be peeled next Tuesday.

If you're searching for more tasty growth prospects, our hot new report identifies 1 Top Small-Cap Stock From The Motley Fool that's looking good. It's a smaller company that has already rewarded its shareholders with a stonking performance, yet the Motley Fool's top analysts reckon there could be a further 45% upside to come.

Want to know the name of this potential small-cap winner? Just click here to get your completely free report today.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the 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.