However, both businesses remain profitable and now have determined management teams who I rate highly. Today I’m going to look at the latest news from both firms and give my verdict on each stock.

A change of culture?

When Tesco boss Dave Lewis took charge in 2014, the company was shaken by an accounting scandal and falling profits. One of Mr Lewis’s first big decisions was to close the firm’s headquarters in Cheshunt and move staff to another nearby corporate office.

As well as saving money, I believe this was an important psychological step towards the change of culture that he wanted to implement as part of his turnaround plan.

For this reason, I was pleased to see this morning that BT has sold its London HQ for £210m and will be moving to a new London location within 30 months.

The money is a drop in the ocean when set against BT’s £11bn net debt. But my reading of this news is that chairman Jan du Plessis and new chief executive Philip Jansen are serious about making the changes needed to transform this business.

The right time to buy?

One area where I think BT is only just scratching the surface lies in integrating customers’ fixed broadband and mobile experiences. In my view, the group has a strong advantage over rivals here, as it owns the EE mobile network and the UK’s largest fixed broadband network.

I think this is one area where BT should be able to provide superior services in the future, hopefully supporting higher profit margins.

At the moment, I think the group’s financial position remains stretched. But BT has access to cheap funding and Mr Jansen has room to cut the dividend.

With BT shares now trading on 7.7 times forecast earnings with a yield of 7.9%, I think the shares look tempting as a long-term buy. I own some already and may add more over the coming months.

A potential double bagger?

Back in May, I suggested that broadband firm TalkTalk Telecom was starting to look interesting. A trading update today has confirmed my view that the company is making good progress since the return of founder Sir Charles Dunstone.

Interestingly, TalkTalk is also in the process of moving its HQ. In the meantime, the firm says that headline revenue rose by 1.3% to £387m during the first quarter, while average revenue per user edged up to £24.72.

More importantly, the net number of new customers signing up for fibre broadband rose to 118,000 during the first quarter, compared to just 67,000 during the same period last year. Chief executive Tristia Harrison says that fibre customers tend to pay more and be more loyal than non-fibre customers.

Analysts expect TalkTalk’s underlying earnings to fall 10% this year before rising strongly from next year. I remain concerned about the group’s £781m net debt, but I expect to see cash generation improve.

TALK stock doesn’t look cheap, on 19 times forecast earnings. But if the business continues to make progress, I think the 110p price tag could look good value in a few years’ time.

The post Why I feel now could be the time to buy into the BT share price appeared first on The Twelfth Magpie.

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Roland Head owns shares of BT GROUP PLC ORD 5P and Tesco. The Motley Fool UK has recommended Tesco. 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.

One company that continues to fall into the latter category, in my opinion, is FTSE 250 constituent Royal Mail (LSE: RMG). 

Back in November, I suggested that its chunky dividend yield wasn’t worth the risk of further price declines. Nothing has occurred in the time since to change my mind. Indeed, I’m beginning to think a dividend cut is now more likely than ever to feature in new CEO Rico Back’s strategy for the company when it’s revealed in March.

Tuesday’s trading statement — covered by my Foolish colleague G A Chester — was poorly received by the market and resulted in another steep decline in the share price. 

Having lost a little over 55% in value since last May, Royal Mail’s shares now trade on a little below 10 times earnings (based on expected EPS of 27.1p). Considering the structural decline of its letters business and concerns over competition from parcels-focused rivals, that still looks too high.

Value hunters should wait until later in the year before re-assessing the investment case, I feel. 

Another loser

But Royal Mail isn’t the only stock in the second tier I’d continue to steer clear of.

Broadband provider Talk Talk Telecom (LSE: TALK) is potentially an even worse pick, despite lots of chat about rising customer numbers in today’s Q3 trading update. 

Talk Talk saw its customer base grow by 44,000 over the period. When combined with data from the other two quarters, the company has now added 148,000 accounts to its books in the financial year to date. Considering that it was forecasting “in excess of” 150,000 for the 2018/19 year as a whole, that’s pretty good going. 

Total headline revenue over the three months to the end of December also rose 2.9% to £386m, although the amount of money made from each customer fell by 2% to £24.70 compared to the previous year.

Looking ahead, the firm said that it was still “confident” of strong earnings growth in FY20 thanks to “customer momentum and cost savings” — the latter the result of the ongoing reorganisation of the business.

Nevertheless, accounting adjustments and further investment in order to lure customers have led Talk Talk to state that underlying profit for this year is now likely to be between £245m and £250m — down £10m-£15m on the consensus estimate from city analysts. This goes some way to explaining why the share price has fallen again this morning.

Away from today’s numbers, I also continue to be wary of the mid-cap’s balance sheet.

Talk Talk had £800m in net debt at the half-year point, almost two-thirds what the company is worth today. That’s too big a burden for me.

Dividends, while safely covered by profits, aren’t exactly attention-grabbing either.

The company is forecast to return 2.5p per share this year, equivalent to a yield of 2.4% at a share price of 103p. As far as I’m concerned, you could get far more from considerably better businesses elsewhere. 

All this, when considered alongside the fact that Talk Talk’s shares traded on a pretty dear 20 times earnings before this morning (despite being in derisory form for many years), suggests that the company continues to offer pretty poor value as an investment. 

The post Royal Mail isn’t the only battered FTSE 250 stock I’d still avoid like the plague appeared first on The Twelfth Magpie.

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Paul Summers 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.

However, recent news from the firm has made me more comfortable holding the shares ahead of a possible recovery. Let me explain.

Director buying

When top executives spend their own cash buying shares in a company they run, it’s generally a good sign. After all, they aren’t (usually) required to buy.

One big boss who’s been buying heavily recently is Royal Mail chief executive Rico Back. He’s spent nearly £1m of his own cash buying shares since 19 November. The average purchase price was 302p, so he’s in line for a dividend yield of 8.1% per year (about £76k), if he can avoid cutting the payout.

In my view this is far from certain. I think a dividend cut is increasingly likely, if not this year then during the 2019/20 financial year, which starts at the end of March.

Buying for a recovery?

I’m sure that Back expects to generate a positive return on his near-£1m investment. But I don’t think we’re going to see the shares bounce back to 400p next year. As I explained recently, Royal Mail faces a number of potentially costly problems.

Back is planning to unveil a new five-year strategy for the group in March. In my view, that’s the kind of horizon investors will need to enjoy strong returns on their investment.

I see his share purchases as a reassuring sign of commitment and confidence. But I’d only buy the shares at this level if you’ve got the time and patience to stay invested for the long haul.

A £2.3m director buy

Back isn’t the only FTSE director who has been splashing the cash. TalkTalk Telecom Group (LSE: TALK) executive chairman Sir Charles Dunstone has spent £1.7m since November buying shares in the broadband provider he founded.

Sir Charles also spent another £570k back in the summer, taking his total spend this year to a chunky £2.3m. With a reported net worth of around £1bn, he can probably afford it. But Dunstone already owned a 28% stake in the firm, so I’d view his purchase as a vote of confidence in his turnaround plans.

Is it time to start buying TALK?

I’ve been cautious about investing in TalkTalk, viewing the firm as “a tempting turnaround” but with too much debt. The stock has traded in a range between 100p and 130p since February, and remained at this level in the run-up to Christmas.

November’s half-year results showed an improved performance, with headline revenue up 3.9% to £771m, and a return to profitability. But the company also revealed that the planned funding partner for its national fibre network has withdrawn, slowing this project.

I suspect TalkTalk will find a solution to this problem, while continuing to improve the profitability of its core operations. But the group’s shares already trade at nearly 18 times 2019/20 forecast earnings and offer a dividend yield of just 2.6%. Given the company’s high debt levels, this doesn’t seem cheap enough to me. I’m going to continue avoiding this stock for a little longer yet.

The post Is the Royal Mail share price heading back to 400p in 2019? appeared first on The Twelfth Magpie.

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Roland Head owns shares of Royal Mail. 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.

With that in mind, the fall in the Talktalk (LSE: TALK) share price on Wednesday of 15% may seem like a disaster for its investors. After all, it is a sizeable loss in a short space of time. However, in the long run the company appears to have recovery potential. With its shares now cheaper than they were, it could be an even more enticing buying opportunity.

Growth potential

In recent months, Talktalk has prioritised growth. The company reset its strategy in May and since then its focus has been on adding new customers and simplifying the business. In this aim, its first half of the year seems to have been successful. It was able to add 46,000 new customers during the period versus a fall in the same period of last year of 29,000.

Its Retail and Wholesale divisions both saw double-digit growth, while the company continues to make progress on churn rates. They are down to 1.3% from 1.5% in the second half of last year. This shows that customer satisfaction and the company’s competitiveness may be improving versus sector peers. The business was also able to post strong growth in fibre, where customer numbers increased by 161,000, and in TV, where customer numbers increased by 19,000. Against a competitive market backdrop, the growth prospects for the business seem to be bright.

Financial outlook

Of course, Talktalk’s focus on growth has meant that its financial performance has disappointed. It recorded a loss in the first half of the year of £75m on a pre-tax basis. This compares to a pre-tax profit of £30m in the first half of the prior year. In addition, dividends have fallen to 2.5p per share from 5.29p per share over the same period. This is disappointing, but unsurprising given the level of investment which may be required to turn the company’s performance around.

In 2018, earnings are due to rise by 26%. This could help to improve investor sentiment over the medium term – especially since Talktalk trades on a price-to-earnings growth (PEG) ratio of just 0.6 at the present time. This indicates that it may offer a wide margin of safety, and that share price growth prospects may be high.

As such, while its investment performance may be volatile and its financial outlook may be uncertain due to the changes it is making to its business, the stock seems to be a sound turnaround opportunity. It could offer excellent value for money at a time when a number of mid and large-cap shares are starting to look relatively expensive.

The post Why I’d buy Talktalk Telecom Group plc after crashing 15% today appeared first on The Twelfth Magpie.

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Peter Stephens owns shares in Talktalk. 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.

Yield isn’t everything 

At first glance, Talktalk looks to be the better income stock. The company’s shares currently support a dividend yield of 7.7% compared to Vodafone’s 5.3%. However, Talktalk’s high yield suggests the market believes the payout isn’t sustainable. Indeed, City analysts are only expecting the company to earn 14.5p per share for the year ending 31 March 2017, while the dividend payout will cost the group 15.7p per share. To put it another way, the payout isn’t covered by earnings per share. That said, Vodafone is also in the same situation. The company’s per share dividend is twice earnings per share.

Still, on a cash basis, Vodafone’s payout is well covered. For the 2016 financial year the company paid out £3bn to investors via dividends but generated £10.5bn in cash from operations. During Talktalk’s last financial year the company’s dividend payout cost £135m and cash generated from operations came in at £182m.

But City analysts expect Talktalk’s fortunes to improve greatly over the next few years. After last year’s hack attack, which severely dented the company’s reputation with customers, management has decided to rebrand the business. And there are already some signs that this rebranding is paying off. For the three months to the end of June, the company reported it had gained 48,000 new mobile customers and 36,000 new fibre customers. Some of these gains were offset by a loss of 32,000 TV and broadband subscribers, but overall customer growth was positive.

Off the back of Talktalk’s renewed marketing and growth drive, the City is predicting earnings per share growth of 72% for this year and 20% for the year after. Pre-tax profit is expected to expand from £14m last year to just under £200m by 2018. Talktalk’s management is targeting headline earnings before interest tax depreciation and amortisation of £320m to £360m for this year, up a double-digit percentage from last year’s reported figure of £260m.

If the company meets these lofty growth targets then perhaps the market will regain confidence in Talktalk’s dividend.

The bottom line 

So, after rebranding, Talktalk could be a better income stock than Vodafone if growth targets are hit, and there are no further setbacks. The company’s dividend yield of 7.7% is certainly extremely attractive in today’s low-interest-rate world. Still, if you don’t trust Talktalk, or you’re not willing to speculate on the company’s future growth trajectory, dependable dividend payer Vodafone might be the better choice. City analysts expect Vodafone’s earnings per share to increase 30% this year and a further 15% for the year ending 31 March 2018.

The post After rebranding, is Talktalk Telecom Group plc a better income stock than Vodafone Group plc? appeared first on The Twelfth Magpie.

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Rupert Hargreaves 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.

The main threat investors seem to be guarding themselves against is uncertainty. Both the ‘leave’ and the ‘remain’ camps acknowledge that if the UK decides to leave the European Union, there will be at least two years of uncertainty, as lawmakers thrash out the details of the divorce. 

During times of uncertainty, defensive stocks tend to prevail, which is why I believe investors should look to Sky (LSE: SKY) and Vodafone (LSE: VOD) to protect against Brexit risks. 

European exposure 

Both Sky and Vodafone have extensive European operations. As a result, it’s likely both companies will suffer some operational issues following a ‘leave’ vote. However, over the long-term these two multimedia giants should be able to continue to grow within both the UK and Europe and are unlikely to be held back by a Brexit. 

Take Vodafone for example. For the year ended 31 March 2016, Vodafone reported organic group revenue growth of 2.3%. Most of this growth came from outside the company’s European area of operations. Vodafone’s service revenue from its African, Middle Eastern and Asia-Pacific operations grew at 6.9% year-on-year. European service revenue shrank by 0.6% on an organic basis for the period and UK service revenue contracted by 0.3% for the period. 

Meanwhile, Sky is chasing its dream to become Europe’s premier entertainment company. During the third quarter of the company’s financial year (calendar Q1) the group’s German division, Sky Deutschland reported its first ever operating profit, while Sky’s Italian division achieved the highest quarterly customer growth in four years, adding 34,000 new retail customers and 49,000 new products. In the UK, for the nine months ended 31 March 2016, operating profit increased by an impressive 15% to £1.2bn. 

On the earnings front, City analysts believe that Vodafone is set to return to growth this year for the first time in five years. Indeed, analysts have pencilled in earnings per share growth of 24% for the year ending 31 March 2017 and earnings growth of 17% is expected for the year after. Based on these figures, Vodafone currently trades at a 2017 P/E of 34.2 and supports a dividend yield of 5.3%.

Sky’s earnings per share are expected to jump by 10% this year. Based on these forecasts the company is trading at a forward PE of 13.7 and the shares support a dividend yield of 3.0%.

One to avoid?

Sky and Vodafone may be the perfect defensive stocks to hold through Brexit uncertainty, but what about Talktalk Telecom (LSE: TALK)? 

Well, following last year’s hack attack investors dumped shares in Talktalk fearing a customer exodus so far, however, this exodus has failed to materialise and City analysts still expect the company top report earnings growth of 72% for the year ending 31 March 2017.  Based on City forecasts the company’s shares are trading at a forward P/E of 14.9, they also support a yield of 6.8% at current prices. This yield may be too hard for some investors to pass up, but considering Talktalk’s record of past mistakes, it might be wise to avoid the company as there are better opportunities out there. 

The post Protect yourself from Brexit with Sky plc, Vodafone group plc and Talktalk Telecom group plc? appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares of Sky. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The only problem is that this dividend looks increasingly unaffordable to me.

TalkTalk’s dividend payout cost the firm £135m last year. At the same time, net debt rose by £90m to £679m. I believe this increase would have been much bigger if TalkTalk hadn’t been able to raise £61m in a one-off sale of surplus shares from its Employee Share Ownership Trust.

These figures make it clear to me that a sizeable part of TalkTalk’s dividend is being funded with debt. This has been the case for several years, in my opinion. This is one reason why the company’s net debt is now a whopping 8.6 times last year’s adjusted post-tax profits.

Adjusted earnings per share are expected to rise by 58% to 14.6p in 2016/17. TalkTalk said on Thursday that it expects to free cash flow to cover the dividend this year. The firm has been investing in new services, so these gains may be possible.

However, even if TalkTalk does deliver on forecasts, the stock’s 2017 forecast P/E of 18 looks expensive to me. I think there’s better value elsewhere.

Can this mining giant beat the odds?

Indian mining giant Vedanta Resources (LSE: VED) has cut its dividend by 52% to 30 cents per share after unveiling a full-year loss of $1.8bn. The firm’s revenue fell by 17% to $10.7bn last year, while earnings before interest, tax, depreciation and amortisation fell by 38% to $2.3bn.

The reduced dividend still provides an attractive yield of 5.5%, although shareholders who bought at higher prices may be disappointed. There was some good news, however. Vedanta was able to reduce its net debt by $1.1bn to $7.3bn, thanks to free cash flow of $1.7bn.

The problem is that the firm’s debt commitments remain massive. Vedanta made interest payments of $1.2bn last year. That’s more than 10% of its revenue. While debt remains high, the shares are fundamentally risky. That’s why I’m not convinced the dividend is safe, even though this year’s dividend payout will cost the firm just $83m.

More trouble may lie ahead

Shares in construction and support services firm Interserve (LSE: IRV) fell by 23% in one day last week after the firm warned it would have to take a £70m cash impairment on a project in Glasgow.

Interserve didn’t provide any updated profit or dividend guidance in its statement. This seems to have left City analysts uncertain about whether to cut their forecasts. Consensus forecasts for earnings and dividends published by Reuters have so far remain unchanged. These estimates suggest that Interserve now trades on a 2016 forecast P/E of just 4.8 and offers a prospective dividend yield of 8%!

Given that Interserve has already warned net debt will rise by £35m as a result of the £70m charge, I believe a dividend cut is a significant risk. I’d be tempted to wait until the picture is a little clearer before considering an investment.

The post Are dividend cuts inevitable at Talktalk Telecom Group plc, Vedanta Resources plc and Interserve plc? appeared first on The Twelfth Magpie.

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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.

With the acquisition of EE, the UK’s largest mobile network, and its £2bn investment in sports and other prime telly, BT can now compete with the rest on all telecoms services. And with forecast P/E multiples of only around 13 to 14, it’s not an expensive foray into the sector.

Expensive mobile

Compare that with Vodafone (LSE: VOD), and you’ll see a company that only does mobile telecoms and whose share price has gone nowhere in the past five years – it’s the weakest performer of the four, with just a gain of 15% to 217p. Granted, Vodafone has higher dividends on the cards, with more than 5% forecast for this year and the next two. But they’re nowhere near covered by earnings, and the shares are on a P/E for the year to March 2016 of more than 44!

Vodafone is developing its next-generation network which will cover a fair amount of Europe, and that will surely boost profits some time in the future. But right now the outlook is uncertain, and the shares seem to be priced for a takeover – they’re too expensive in my book.

Second place?

The five-year share price record for Sky (LSE: SKY) isn’t too hot either, with just a 22% gain to 1,004p. Dividend yields come out slightly ahead of BT’s with 3.4% forecast for the year to June 2016, and they’re well enough covered and are progressive. But on P/E terms, the shares look a little pricey to me – this year’s forecast gives us a multiple of 16, rising to above 17 with an earnings fall predicted for 2017.

Sky’s biggest non-financial strength is its position on the premium TV market, and though BT has made small inroads and cable TV is a serious competitor, Sky looks like it will be the dominant provider, especially for sports, for the foreseeable future.

Security breach, oh dear!

TalkTalk Telecom (LSE: TALK) shares were actually outperforming BT until June last year, but they were already going off the boil before a damaging security breach in October 2015 exposed some customer data to hackers. Thankfully the damage was small, but it has shaken confidence in the company’s ability to protect its customers. The share price retreated to a five-year gain of 77.5% – better than Vodafone and Sky, but still way behind BT.

The price has regained 24% since February’s low, to 239p, and there’s strong double-digit earnings growth forecast for the next couple of years, but it would take until March 2018 to get the P/E down under 14 from today’s 25. TalkTalk also has what I see as a bizarre dividend policy. It’s been making uncovered payments for the past two years with the same expected for March 2016’s mooted 6.6% yield, but even by 2018 we’d still see it only just covered.

There’s room in the telecoms sector for all four to do well, but BT still looks the most prudent long-term buy to me.

The post Why BT Group plc Still Beats Vodafone Group plc, SKY PLC And Talktalk Telecom Group PLC appeared first on The Twelfth Magpie.

More reading

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• Down 16% to around £2.03! Here’s where BT’s bargain-basement shares ‘should’ be trading right now
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.