This 8% yield could be a top dividend buy for 2017

I think it’s safe to say that 2016 was a difficult year for TalkTalk Telecom Group (LSE: TALK), with pre-tax profits plummeting to just £14m for fiscal 2016, after being hit by £42m of exceptional costs as a result of the cyber-attack that hit the headlines the previous year. The security breach left the group with both a bruised reputation and a battered share price.

Showing off

A year on from the data breach, and curiously on the same day as the company’s interim results, it was announced that a 17-year-old boy had admitted to seven offences in relation to the hacking incident. The teenager was actually arrested a month after the incident, following an investigation by the Metropolitan Police’s Cyber-Crime Unit, and charged with breaching the Computer Misuse Act 1990. The boy claimed he wasn’t aware of the consequences at the time, and was just showing off to his friends.

The FTSE 250 telecoms group has since been working hard to restore its damaged reputation and hold on to its existing subscribers, with reports suggesting the company has lost more than 100,000 customers in the wake of the cyber-attack. TalkTalk’s latest trading update suggests to me that the group could be beginning to turn things around, after reporting a £40m surge in first half earnings to £130m, a 44% improvement on the same six month period a year earlier.

Transformation programme

The strong growth in earnings was attributed to a significant improvement in subscriber acquisition costs and marketing, with £17m of savings coming from the group’s Making TalkTalk Simpler transformation programme. The company’s operating profit also improved significantly during the period, rising from £25m to £60m, with pre-tax profits climbing to £46m, more than triple the £14m reported for the first six months of FY 2016.

The group now expects to deliver materially higher full year profits than last year, and has maintained a relentless focus on looking after its existing customers. TalkTalk also continues to keep up the pace across a wide range of operational improvements to make their offering much simpler and better for customers. The strategy seems to be bearing fruit with year-on-year improvements in customer satisfaction and reduced churn.

Delicious dividend

After almost two years of decline, TalkTalk’s valuation is beginning to look very appealing, with the shares currently trading at less than half their 2015 peak of 408.8p. Furthermore, the consensus in the City seems to concur with management’s expectations of significantly higher profits, with analysts’ estimates predicting a 60% rise in underlying earnings to £128m for the year to the end of March, with further improvements of 11% and 10% to come in FY 2018 and FY 2019.

These forecasts would leave the telecoms firm trading on a bargain valuation of just 10 times earnings by 2018/19, and coupled with a delicious dividend yield of 8.5%, TalkTalk might just be too hard to resist.

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Bilaal Mohamed 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.