Despite strong results for Vodafone and TalkTalk, there are reasons to be cautious before investing in British telecoms companies.
The last week has seen UK telecom companies Vodafone (UK code: VOD) and TalkTalk (UK code: TALK) both deliver company results.
While they are focused on quite different markets (Vodafone mobile phones globally; TalkTalk broadband-focused in the UK), they both offer temptingly high income streams via dividends (over 6% annually from Vodafone; 8% from TalkTalk). So, should investors get interested in these two phone companies?
All three major UK telecom companies (including BT) have seen falls in their share prices over the last year (Chart 1), in the process doing worse than the FTSE 100 index. So up to now, the market has not been too keen on these shares.
Vodafone: doing fine near-term, but where will the growth come from in the long-term?
Vodafone's results were what are classically called "a mixed bag" – some good elements, some bad.
First of all, what were the good elements?
- Growth improved in Europe to 1.0% (was negative before);
- Strong growth of over 7% in Africa, Middle East, Asia and Pacific;
- Dividend was raised 1.9%
But then there were also several weak elements:
- Vodafone wrote down the value of their Indian business by £5billion. This was due to bitter competition in India from new competitors, weighing heavily on Vodafone's profits there;
- The UK saw weak results with a near-3% fall in domestic sales, due partly to specific billing problems Vodafone is having at the moment.
On the whole, more-or-less reassuring then despite the big hit taken in India; but the real question remains unanswered – how will Vodafone generate growth in the future?
According to average analysts' forecasts, Vodafone's sales will fall in 2017 and 2018, making it difficult for Vodafone to produce higher profits (Chart 2).
So while analysts are positive on the outlook for Vodafone shares, with an average price target nearly 30% above today's 203p level, so far the market does not seem to agree, with the share price falling since the results announcement.
TalkTalk: still struggling post its data hacking scandal
Looking at TalkTalk's results, it is more difficult to find much seasonal cheer as an investor. There was quite a stream of ongoing difficulties to report:
High-margin broadband customers continue to desert the company over the six months to end-September. Over the period, 98,000 customers left TalkTalk, while only…
