All else being equal, I prefer to invest in companies that treat their customers well. I reckon there’s less risk of nasty surprises or future mishaps. And I think there’s a good chance operational excellence will also be reflected in a company’s financial management.

Buy this 5% yielder today?

Water utilities are starting to feel political heat about the way they manage their finances. A particular concern is the level of dividend payouts, relative to profits.

United isn’t the worst offender here, but last year’s dividend payout of £270m still accounted for 76% of the group’s reported profits of £354m. In contrast, the group only spent £149.5m on infrastructure renewal last year.

Is this a problem? If the profit margins allowed by the regulator are cut, then the group’s dividend could become hard to afford. But even allowing for this risk, I suspect United will remain a solid investment for income-only investors.

The firm’s shares have fallen by nearly 20% over the last year, lifting the forecast dividend yield to 5.3%. At this level I believe the shares could be worth buying for a long-term income.

A better choice for dividend growth?

Traditional utilities are feeling some political heat at the moment. If you’re unsure about investing directly but would still like some exposure to this income sector of the market, one alternative is FTSE 250 firm Telecoms Plus (LSE: TEP).

This business trades as Utility Warehouse and uses its bulk-buying power to sell bundled utilities to customers. The company expects to benefit from the energy price cap planned by regulator Ofgem later this year, as it will be able to pass on lower costs to its customers. This will make it easier for the firm to compete against smaller energy suppliers who are winning market share by offering cheap introductory deals.

A good set of figures

Today’s results suggest the business is still growing, even without this potential tailwind. Revenue rose by 7.1% to £792.9m during the year to 31 March, while adjusted pre-tax profit climbed 1.8% to £54.3m. The dividend will rise by 4.2% to 50p per share, giving a yield of about 4.7%.

Customer numbers rose by 0.5% to 610,739, but the number of services sold rose by 2.2% to 2.3m. Almost 20% of customers now take all five of the group’s services (landline, broadband, mobile, electricity and gas).

Is the dividend sustainable?

The firm’s balance sheet looks healthy enough. Year-end net debt of £11.2m isn’t significant given the group’s profits.

Like United Utilities, Telecoms Plus pays out very generous dividends. Last year’s dividend of 50p per share accounted for 90% of adjusted earnings of 55p per share. And my calculations suggest that this payout won’t quite be covered by free cash flow.

The big difference here is that Telecom Plus’s business doesn’t require much working capital or investment. If earnings remain stable, I’d expect the dividend to be sustainable.

Broker forecasts for 2018/19 put the stock on a P/E of 17 with a prospective yield of 5%. At this level, I think the shares are worth considering as an alternative to traditional utility stocks.

The post This overlooked FTSE 100 5% yielder could be a retirement buy appeared first on The Motley Fool UK.

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Roland Head 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.

Firm favourite

The Newbury-headquartered group remains a firm favourite with investors thanks to its low-risk profile and generous dividend payouts. But in recent years the sustainability of these payouts has been called into question, with the group’s earnings unable to keep up with its rising dividends. If anything it makes this morning’s full-year results all the more interesting.

For the year ending 31 March the group reported a 4.4% decline in revenues to €47.6bn, with full-year organic service revenues up by 1.9%. But the standout figure was the massive €6.1bn loss it suffered, largely due to its troubled Indian operations, which it is now spinning off. Earlier this year the company reached an agreement to merge Vodafone India with Idea Cellular, one of the country’s leading mobile network operators.

Dividend hike

But there were also plenty of positives, with organic adjusted earnings (before interest, tax, depreciation, and amortisation) rising 5.8% to €14.1bn, and second half adjusted earnings up by 6.3%. Free cash flow for the year was reported at €4.1bn, with this figure expected to rise to €5bn during the current fiscal year to March 2018.

Management also announced its intention to pay a final dividend of 10.03 euro cents per share, up 2% on the previous year, leaving the total payout for the year at 14.77 cents, also up 2% year-on-year. The market reacted positively to the announcement with Vodafone’s shares up by around 4% in early trading.

I believe that Vodafone’s management will continue to do its utmost to fulfil its promise to raise the dividend payouts year-on-year. A prospective dividend yield of 6.2% should keep income seekers happy for the time being, and that in itself should help to support the share price over the medium term at least.

Upward trend

For those seeking a little more than just dividends, perhaps a more exciting alternative to Vodafone could be Telecom Plus (LSE: TEP). The FTSE 250-listed group, which owns and operates the Utility Warehouse brand, is the UK’s only fully integrated provider of a wide range of utility services spanning both the Communications and Energy markets.

In its latest trading update the group said that both customer and service numbers for the full year to the end of March had shown modest growth, with an encouraging upward trend starting to emerge during the final quarter.

Better quality customers

Over the past couple of years the company has also seen the proportion of new members who are switching all their services to the Utility Warehouse brand rise from around 30% to 55%. These are regarded as better quality customers given their higher expected lifetime value.

With a prospective yield of 4.2% currently on offer, Telecom Plus remains a buy for steady long-term growth and a rapidly rising dividend.

The post Is Vodafone Group plc still a buy after FY results? appeared first on The Motley Fool UK.

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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. 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.

Shares offering a yield of about 5% can be ideal. This level of yield is high enough to be worthwhile, but is often low enough to be safe.

In this article I’ll take a look three possible choices.

Above-average returns

Motor insurer Admiral Group (LSE: ADM) released a solid set of results last week. Pre-tax profits rose by 6%, while earnings per share were 4% higher at 107.3p. Most importantly for us, the full-year dividend was hiked by 16% to 114.4p per share.

This gives Admiral a trailing yield of 5.8%. However, you may have noticed that last year’s dividend was not covered by earnings per share. That’s because, in addition to a large share of post-tax profits, Admiral was also able to return some surplus capital to shareholders.

This aspect of Admiral’s dividend is common to many other insurance companies. It means that yields can be very high, but the payout will not always rise each year. Insurers also tend to be cyclical. Claims levels vary, and sometimes insurers are forced to cut prices or reduce their market share.

Despite these risks, Admiral has a track record of above-average shareholder returns. I believe the shares could be a good income buy.

Dividend pledge

Vodafone Group (LSE: VOD) currently offers a forecast dividend payout of 11.5p per share for the current financial year. This equates to an attractive yield of 5.3%. The only problem is that Vodafone is expected to report earnings per share of just 4.6p this year. The dividend won’t be covered by earnings.

Vodafone’s earnings are expected to rise to 5.7p per share next year, but the dividend will still be uncovered. When might this situation improve?

Vodafone has been spending heavily on network upgrades and acquisitions. However, this spending is nearly complete and Vodafone boss Vittorio Colao has promised that free cash flow and earnings should soon start to improve. He’s also pledged to maintain the dividend.

Vodafone can afford to do this, as the group’s debt levels are relatively low. The recent third-quarter results also suggest that earnings momentum is improving. I’m happy to continue holding my Vodafone shares for income.

Tough competition

Sales and profits have continued to rise at Telecom Plus (LSE: TEP), despite the 50% fall in its share price since January 2014.  The group makes money by re-selling utilities and telecoms through its Utility Warehouse business. Adjusted earnings are expected to rise to 56.6p per share this year, giving a forecast P/E of 16.1.

Current forecasts suggest that the dividend will rise by 15% to 46p per share. This would give dividend cover of 1.2, which seems low. However, the firm’s past results suggest that this payout should also be backed by free cash flow, making it relatively safe.

Analysts remain bullish on Telecoms Plus and are forecasting 9% growth for 2016/17.

Personally, I’m not sure how long growth can continue in the face of tougher competition from the utilities themselves. Any downturn in sales could trigger a longer-term decline in future cash flow, reducing the group’s ability to pay dividends.

I’m unsure about Telecoms Plus, but believe Admiral and Vodafone could both be good income buys.

The post Can You Trust 5% Yields From Vodafone Group plc, Admiral Group plc & Telecom plus PLC? appeared first on The Motley Fool UK.

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Roland Head owns shares of Vodafone Group. 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.

Both companies published full-year results this morning, but is either company a buy?

Bilby

Bilby shares touched 100p this morning, after the firm published its first set of results following its March IPO.

Bilby operates as a gas heating and building maintenance services provider in London and the south east. The firm’s trading business, P & R Installation Company, is focused on contract work with housing associations and local authorities, and provides services to more than 100,000 homes and commercial properties.

Impressive results

Bilby’s results made for impressive reading, in my view. The firm’s operating margin rose to 13.4% in 2014/15, from 8.8% in 2013.

Bilby has changed its year-end date so today’s figures cover 14 months, compared to 12 months for last year’s figures. This means that you can’t readily calculate percentage increases on last year’s sales and profits, but the upward trend is obvious.

Turnover was £14.91m, up from £9.73m during the previous year. Operating profits rose from £0.86m to £2.0m last year, while pre-tax profits rose from £0.83m to £1.98m.

Earnings per share for last year were 6.1p, giving a trailing P/E of 14.8. That’s backed by a dividend per share of 2.32p, giving a yield of 2.6% at the current 90p share price.

Bilby’s attractions are enhanced by a strong balance sheet, with net cash of £1.7m and no debt.

Outlook

The only broker forecast I can find for Bilby is by the firm’s house broker, which was forecasting earnings per share of 3.15p for 2015/16 before today’s results.

I’d expect that forecast to now be substantially upgraded. Bilby says its current order book is worth £95m, or nearly eight years’ revenue based on last year’s figures. Bilby has reported several new contract wins recently, and I believe further growth is likely.

Bilby’s growth could slow if the housing market cools, but its focus on rented properties means that this is less of a risk than for companies that focus on owner-occupied homes.

Telecoms Plus

Shares in Telecoms Plus fell by 18% in one day in April, after the firm admitted that it would have to write off £11m of bad debt and said that profit growth for the year would be “significantly below market expectations”.

The group, whose main trading business is Utility Warehouse, issued its final results today. Investors appeared to be relieved, and the shares rose by 3.5% to 850p this morning.

Revenue rose by 10.5% to £729.2m, while reported pre-tax profits rose by 21.3% to £42.1m. Adjusted earnings per share rose 9.3% to 53.0p, in-line with recent forecasts but 16% lower than the 69p per share consensus forecast in place before April’s profit warning.

However, Telecom Plus did deliver its promised 14% dividend increase, taking the full-year payout to 40p per share. This gives a prospective yield of 4.7% that should rise to 5.4% in 2015/16, based on the firm’s commitment to increase the dividend by 15% to 46p this year.

The high yield on offer from Telecoms Plus looks attractive, but in my view the current valuation of 16 times trailing earnings is probably enough, making the shares a buy for income only.

The post Why Are Bilby PLC And Telecoms Plus PLC Rising Today? appeared first on The Motley Fool UK.

More reading

• A 9.1% forecast yield! 1 under-the-radar FTSE income share to buy today?
• 3 FTSE shares tipped to grow 100% (or more) in the next 12 months

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.