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Telecom Plus can handle a recession

With fears of a coming recession intensifying, it is time to consider adding shares to your portfolio of companies whose revenues hold up well when the economy sours.

Even as consumer budgets are squeezed, they are not likely to cut back too much on things like light and heat, hence utility companies are good bets in recessions.

Telecom Plus (LSE: TEP) sells a diverse mix of gas, electricity, fixed-line and mobile telephony, broadband, home and boiler insurance and installation to both residences and business, and has no significant foreign currency exposure.

Loyal Customers

Creditworthy, higher-spending members are recruited by TEP’s network of partners who are remunerated for signing up new members and also receive a share of the revenue generated.

104,400 new members have been signed up over the last five years. Fair long-term pricing, discounts for bundled services, and a single monthly bill, along with other benefits, retain customers better than striving to offer the lowest introductory fixed tariffs.

TEP has received awards for service quality and customer satisfaction and can boast a customer churn rate of 12%, which is half the industry standard.

Revenues have increased from £81.8 million in 2004 to £804.4 million for 2019, growing even during the worst recession in living memory. The operating profit margin is stable, averaging 5.51%, because TEP can spread its overheads across a range of provided services, and does not have to maintain a large infrastructure. This margin has held up even as average revenue per customer has fallen due to an Ofgem price cap, and warmer winter.

14 competitions have ceased trading over the last 18 months or so because they fought to be the cheapest on price comparison sites, TEP has played a different game and remains convincingly in the fight.

Low Debt

Net interest and operating lease commitments are covered 22 times over by operating profit, and historically total debt has been just 35% of the financing mix. In 2017 a 20% stake in Opus Energy Group Ltd was sold for £71.1 million reducing the gearing ratio, which the company is returning to the identified optimal level of 35%.

These events have allowed the company to pay out more in dividends than it earned over the last two years. This cannot continue indefinitely, and the company intends to pay out 85% of net income as dividends in the future.

Net income is stable at around 4% of revenue, but to maintain or grow the total dividend payment will take an unrealistic increase in revenue unless it is funded with excess debt.

I feel a dividend cut is coming and may be somewhat priced in as you can pick up shares for 1,244p, well below the June 2019 high of 1,528p seen just before the last annual report was released. You will be paying 29 times the net income per share, but that’s better than the 33 seen with SSE, an energy generator and supplier, which has a large infrastructure to maintain.

I think this is a fair price to pay for a company that could deal with the gloom better than others.

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James McCombie 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.