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Why Telecom Plus plc could beat the competition

Can Telecom Plus (LSE: TEP), which supplies services likes broadband, landlines, gas and electricity, survive an era of low energy prices and ultra-competitive supplier offers? Today’s results suggest the firm is coping well and could soon start to benefit from the impact of rising energy prices.

Telecom Plus shares have risen by 15% so far this year, in marked contrast to some of the company’s more conventional competitors. So if you’re looking for a reliable income plus a slug of growth potential, should you consider this alternative stock?

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Poised for growth?

Telecom Plus said this morning that although sales fell by 0.9% to £291.3m during the first half, the group’s adjusted pre-tax profit rose by 11.5% to £25.1m. Full-year adjusted pre-tax profit is now expected to be at the upper end of the guidance range of £55m-£59m.

Unfortunately, this increase in profit may not be quite as impressive as it sounds. It seems to be the result of a £4.2m refund of costs relating to the UK’s smart meter rollout program. It’s not clear what portion of these costs were incurred during the first half of this year. So I’m going to work on the assumption that excluding the effects of the smart meter rollout, the company’s underlying profits were broadly flat during the first half.

Despite this, there was better news for shareholders. The interim dividend will rise by 4.5% to 23p. Based on a forecast total payout of 49.4p this year, Telecom Plus shares offer a tasty 4.1% yield. That looks good value, to me especially as last year’s dividend was covered comfortably by free cash flow.

Is it a buy?

Telecom Plus doesn’t offer introductory discounts to customers. The company’s policy is to only offer discounts where they’re available to existing customers too. This has made it tough to compete with some of the bargain-basement new customer offers available from broadband and utility suppliers.

However, the firm’s management believes this situation may be changing, with utility prices in particular now starting to rise. If they’re right, then Telecom Plus’s offerings may become more competitive. This could trigger a fresh round of growth. Telecom Plus could be worth a closer look.

What about this heavyweight?

Some investors doubt whether Telecom Plus has a long-term future. Telecom and utility companies such as BT Group (LSE: BT.A) appear to be increasingly focused on acquiring direct customers.

This long-term view may make sense, but BT shares have fallen by almost a quarter this year, thanks to falling earnings per share and the risks attached to the group’s £9.5bn pension deficit.

BT’s post-tax profit is actually expected to rise from £2.6bn to £2.9bn this year. But the new shares issued as part of the EE acquisition mean that earnings per share are expected to fall. There’s also a risk that at some point in the future, BT’s dividend could be cut to help fund additional pension contributions.

Although these risks are real, I’m not overly concerned. BT’s operational performance still seems strong. The group’s pension deficit could fall fast, if the increase in bond yields seen since Donald Trump’s election is maintained.

BT’s valuation also seems fairly reasonable. A forecast P/E of 12, and a prospective yield of 4.2%, suggests very little growth is priced into the shares. I’d hold for now.

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Roland Head 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.