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Is the Royal Mail share price or this falling FTSE 250 knife the brighter bargain today?

There is little respite for investors in TalkTalk Telecom Group (LSE: TALK) with the stock falling more than 4% this morning even though today’s trading update showed the group reducing its statutory loss before taxation from £95m to £4m.

Bad to Talk

It hasn’t been good to TalkTalk for some time with the FTSE 250-listed stock trading 54% lower than five years ago (the 2015 hacking scandal didn’t help) as it has struggled to compete in the competitive broadband market. There was some respite in today’s first-half results with its customer base up 104,000 to 4.24m and churn falling to its lowest ever level of just 1.1% in the second quarter.

Statutory revenue, which covers all sources of earnings, fell 0.6% to £822m as TalkTalk exited its mobile virtual network operator (MVNO) proposition. However, headline revenue excluding Carrier and Off-net earnings rose 3.9% to £771m.

TalkTalk also announced an acceleration of its full fibre strategy, launching a new company, FibreNation, to roll out faster, more reliable full fibre broadband to 3m homes and businesses. The first three towns to benefit will be Harrogate, Ripon and Knaresborough, alongside a trial site York, with a combined footprint of more than 100,000 homes and businesses. 

Dividend cut

The group is also moving its HQ to Salford, to create one main campus and a more efficient operating model. However TalkTalk’s turnaround strategy involves cutting its dividend to help pay for its full fibre plans and its has cut the interim dividend to 1p per share, down from 2.5p last year. It offers a low forecast yield of 2%, with cover of 2.4.

There was some good news today, but not enough to justify the current forward valuation of 18.4 times earnings, as earnings forecasts disappoint. TalkTalk isn’t cheap.

Snail Mail

Investors in Royal Mail (LSE: RMG) have had an equally rough ride over the last five years with the stock down 44%, but at least they get a massive 7.8% yield. Cover may be wafter thin at just 1.1 but it doesn’t seem at risk yet, with CEO Rico Back increasing the interim payout by 4% to 8p last week.

Royal Mail reported a 25% drop in underlying operating profit before transformation costs to £242m, as a 6% rise in parcel volumes failed to offset the 7% fall in letter volumes in the six months to 23 September. Trading at 316p, it is below its flotation price of 330p (so maybe it wasn’t overvalued after all) and it could even fall below 300p.

Income delivery

The £3.15bn company is trading at a discounted price, in this case 11.7 times forecast earnings. That buys you an uncertain outlook, with earnings per share forecast to fall a whopping 40% in the year to 31 March 2019, and zero growth anticipated the next year.

Royal Mail is struggling to generate new income streams, with underlying first-half revenues up just 1%, although adjusted group operating profit before transformation costs remains unchanged at £500m to £550m. Management clearly has a battle on its hands turning things around, and victory is far from certain. On the other hand, the share price now looks tempting, while the yield is dizzying. I would buy it ahead of TalkTalk.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.