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Forget Vodafone! I’d buy this strong-performing utility share instead

Telecoms giant Vodafone looked over-valued to me for a long time. Now the shares seem to be trending down, which is taking some of the froth off the valuation.

However, earnings still don’t cover the dividend payments the firm is sending out to shareholders. I see too much risk for investors and would rather go for a strong performer in the utility sector such as Telecom Plus (LSE: TEP), which is known for its Utility Warehouse trading name.

An effective business model

The firm proclaims that it is the UK’s only fully integrated provider of a wide range of competitively priced utility services spanning both the communications and energy markets.” As such, I think the company presents investors with an interesting alternative to buying shares in sometimes-struggling utility firms such as National Grid, SSE and others, or in smaller and less diversified utility agencies such as Inspired Energy.

Generally, I’m keen on the agency/consultancy model in the utility sector rather than investing in capital-intensive and debt-laden providers and distributors of utility services. The business model of buying in then selling on for a profit is much simpler and often more profitable than getting involved with producing or distributing the utility product.

Telecom Plus has a decent five-year-plus record of generally rising revenue, earnings, cash flow and dividend payments. Today’s full-year results report for the trading year to 31 March reveals further progress. Revenue rose 1.5% compared to the previous year and adjusted earnings per share moved just over 7% higher. The directors expressed their confidence in the outlook by pushing up the total dividend for the year by 4%.

The company calls its customers members and they get one monthly statement covering all the utilities they take from the firm such as gas, electricity, telecoms, broadband and others. Unusually, growth comes from ‘word of mouth’ via members and partners only, and the firm doesn’t advertise in the media. The business model suggests that customer satisfaction is essential if growth is to continue.

A positive outlook

And right now, things appear to be going well with the firm reporting “significantly” faster growth in both customers and partners during the period compared to the previous year. There was an 8.2% uplift in services supplied, to 2.5m, and around 26% of customers buy their energy, broadband and mobile services from Telecom Plus.

Looking forward, the outlook is positive. Chief executive Andrew Lindsay said in the report that higher confidence from partners, ongoing steady growth and improving gross margins means the total dividend for the current trading year to March 2020 should increase by 10% to 57p per share.

With the shares at 1,514p, the anticipated dividend yield is, therefore, a smidgen below 3.8%. Meanwhile, the forward-looking price-to-earnings ratio sits in the early twenties. Telecom Plus isn’t the cheapest share in the sector, but I’d pay up for the quality of earnings and cash flow backing that dividend.

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Kevin Godbold has no position in any share 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.