The main factor behind my increased optimism towards Vodafone is the group’s strong competitive position in the UK and Europe. In recent years, the company has invested well over £19bn into upgrading its networks in the Continent, which has dramatically improved data connection speed. And it has rolled out 4G coverage into a variety of new markets.

This was an expensive capital project, but if data usage by consumers continues to rise significantly as ever more devices are connected to the internet, it will stand to reap the benefits. This is because data usage is one of the higher-margin activities telecoms firms are involved in, so the 61% year-on-year uptick in data usage by customers that Vodafone recorded in the quarter to December should be very welcome for investors.

Furthermore, as the massive Project Spring investment programme winds down, capex spend should fall back towards its historic levels. These twin factors have helped management guide for 2018 EBITDA of between €14.75bn and €14.95bn with free cash flow of around €5bn before the costs of acquiring new wireless spectrum licenses. This would be a significant improvement over the past two years.

Now, there is still significant progress that Vodafone needs to make in areas such as cost-cutting in order for investors to regain confidence in the telco. But with its shares offering a 6.3% dividend yield safely covered by cash flow, and decent growth prospects from wider trends and wise investments, I believe Vodafone could outperform its index over the next year if it finally meets investors’ expectations.

A budding dealmaker to keep an eye on 

Another company in the telecoms sector that interests me is Zegona (LSE: ZEG), which was formed as a holding company with the intention to buy, improve and sell on telecoms providers in European markets.

The group has recently completed its first such purchase, improvement and disposal cycle with Northern Spanish telecom Telecable. Zegona notched up a healthy cash return on last year’s sale of Telecable and while its post-sale equity holding in the acquirer, Euaskatel, hasn’t performed as well, with a falling share price, it still shows the management team has the necessary expertise to find suitable targets, buy at an attractive price and deliver good returns to shareholders.

The group is now looking for its next acquisition but in the meantime pays out a 7.43% trailing dividend yield thanks to cash left from the Telecable sale and cash flow from its equity interest in Euskatel. This dividend yield will naturally fall as management has returned the bulk of the proceeds of the sale to shareholders via a £140m tender offer, but there will still be continued payouts while management searches for its next purchase.

I wouldn’t buy the shares right now until the next such purchase is announced, since it will be funded through a rights offer more likely than not, but Zegona is definitely an interesting company I’ll keep watching closely.

The post Why the Vodafone share price could outperform the FTSE 100 this year appeared first on The Motley Fool UK.

The key to dividends more than doubling in just five years has been continued success in the company’s business model of buying, improving and selling industrial businesses. Its portfolio currently consists of two businesses: specialised HVAC manufacturer Nortek and industrial turbine manufacturer Brush.

While the latter has been dinged by the downturn in oil & gas markets, the former is being improved at a rapid clip. In the six months to June, underlying operating profits from the Nortek business rose 54% year-on-year (y/y) to £145.5m as margins rose significantly. This more than made up for the weak performance of the smaller Brush energy business and led group earnings per share to more than double from 2p to 4.9p.

The appeal of Melrose for growth investors is clear, the company has a fantastic record of executing its business model and, aside from the energy portion of the Brush business, has proved prescient at exiting cyclical markets at just the right time. This should appeal to income investors as well since management has a strong record of returning a large portion of disposal proceeds to investors via dividends.

With Melrose management once again on the hunt for a new acquisition, Nortek performing very well and interim dividends rising from 0.3p to 1.4p in 2017, I see plenty of reason for income investors to take a closer look at the company today.

Successful so far

If imitation is the sincerest form of flattery then Melrose should be very happy as its buy, sell, improve business model is being replicated by £330m market cap upstart Zegona Communications (LSE: ZEG). Rather than industrials, Zegona concentrates on small European telecoms and recently completed its first disposal since going public in 2015.

The sale of its regional Spanish telco Telecable to larger competitor Euskatel was struck at €701m and made up of €186.5m in cash, the assumption of €245m of Telecable debt and a 15% stake in Esukatel itself. This was great news for income investors as, in addition to the 5p per share annual dividend, or a 2.9% yield at today’s share price, management is going through with a tender offer that will allow shareholders to sell up to 36% of their shares at a hefty premium to today’s share price. In total, the tender offer and £9.8m annual dividend will return upwards of €158m to shareholders.

Looking ahead, there’s good prospects for Zegona to replicate the success of its first deal as there are many small telecoms businesses scattered across Europe that could benefit from management’s focus on improved service levels to increase revenue and cash flow.

The post 2 top dividend stocks I’d buy for the long term appeared first on The Motley Fool UK.

Impressive performance

Zegona Communications (LSE: ZEG) released upbeat results on Thursday. The European telecoms company, which specialises in buying, fixing and then selling businesses across Europe, reported a rise in revenue of 3%, with cash flow increasing by 9.7%. In its first year of ownership of Telecable, Zegona has enhanced its product offering, while also providing a new, innovative mobile access agreement with Telefonica. This provides 4G services at a much improved cost, while online sales and greater efficiencies have also boosted the business.

Another year of double-digit cash flow growth is forecast in the current year. In terms of profitability, Zegona is expected to move from a red bottom line to a black bottom line in 2017. It is then due to follow this up with earnings growth of 68% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 0.5. Compared to BT’s forecast rise in earnings of 3%-4% per annum in the next two years and its PEG ratio of 2.5, the smaller telecoms company seems to offer the better value growth opportunity at the present time.

Income prospects

Improving financial performance should help to pay for an 11% rise in dividends, which puts Zegona on a dividend yield of 3.4%. Looking ahead, further dividend growth is expected in 2018. In fact, a rise in shareholder payouts of 50% is anticipated next year, which puts the company on a forward yield of 4.8%.

This compares unfavourably to BT’s forward dividend yield of 6%. However, the growth rate of BT’s dividend in future years may be somewhat disappointing. It continues to invest heavily in its sports rights, while the integration of EE also poses risks due to its sheer size. In addition, the uncertainty surrounding the company’s Italian operations may mean it decides to retain a greater proportion of capital rather than paying it out to shareholders.

Looking ahead

While Zegona is a relatively small and risky stock to buy, its outlook and valuation indicate that it offers significant upside potential. A rapidly rising dividend could also cause investor sentiment to improve, which could make it a sound income, value and growth proposition. By contrast, BT’s future holds significant uncertainty. It may have a high forward dividend yield, but its valuation seems excessive given its disappointing growth outlook. As such, Zegona seems to be the more attractive investment at the present time.

The post Is this rising star a better buy than BT Group plc? appeared first on The Motley Fool UK.