Why I’m Resisting The Temptation To Buy Talktalk Telecom Group plc, Centrica plc And Enquest plc


Shares in TalkTalk (LSE: TALK) have risen 4.5% today, on news that the extent of data accessed in its latest cyber attack was significantly less than originally suspected. Fewer than 21,000 bank details had been accessed, despite the company having more than 4 million customers.

Nevertheless, TalkTalk’s customers are likely to remain concerned that their personal data may have been affected and TalkTalk’s reputation for data security has been severely damaged. Repairing the damage to its brand will no doubt take time and cost the company dearly.

Even before the hack, TalkTalk shares have underperformed the market. Up until the attack was announced, the value of its shares had already fallen by 25% since its peak in June this year, and this reflects the company’s slowing growth outlook. TalkTalk’s sales growth in the first quarter slowed to a lacklustre figure of 3.5%, as competition on pricing has begun to intensify in the broadband market.

TalkTalk’s valuations are unattractive too. Its shares trade with a P/E of 29.4 and 7.8 times its book value. TalkTalk does have an attractive dividend yield of 5.7%, but the sustainability of the dividend is in question. Capital expenditure have been rising as TalkTalk builds its fibre broadband network in York and the company does not generate enough free cash flow to cover its dividend payments.


Centrica‘s (LSE: CNA) prospective dividend yield of 5.1% may tempt many dividend investors, but investors should remain cautious over the utility company’s deteriorating outlook on earnings. Owning both downstream and upstream have historically helped it to offset volatility in commodity prices and allow it to generate stable cash flows, but now, both businesses are struggling.

Falling commodity prices have hurt its upstream business, whilst increased competition has put pressure on its supply margins. As these tough trading conditions are unlikely to go away any time soon, shares in Centrica could have further to fall.


EnQuest‘s (LSE: ENQ) focus in the North Sea oil is why I have been avoiding shares in the company. The North Sea is one of the more expensive oil producing regions in the world, and its operations there puts the company in a weak position to cope with the “lower for longer” outlook on oil prices.

Although EnQuest is trying to reduce its production cost, it is still one of the higher cost producers on the market, as EnQuest has many mature North Sea wells, which are uncompetitive in today’s low oil price environment. The company also appears to be burning cash too quickly, with its capital expenditure budget this year likely to be more than three times its operating cash flow.

Net debt has risen by almost $350 million in the first half of 2015 alone, and now stands at $1.28 billion. And as banks are becoming increasingly reluctant to lend to the sector, EnQuest could be forced to ask shareholders for more cash.

Buy and Hold forever?

If you're more interested in reliable income generating stocks, The Motley Fool has a free special report that's aligned with your investing goals -- "The Fool's Five Shares To Retire On".

These five large-cap shares have been selected for their combination of income and growth prospects. They generate stable cash flows from their dominant market positionsand broad global exposure.

Get your copy now! It's completely free and there's no further obligation.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.