The telecoms sector is back in the spotlight today after TalkTalk announced a bigger than expected cut to its dividend as new executive Chairman Charles Dunstone took drastic action to shore up the company’s balance sheet.
This has seen the shares drop back sharply towards this year’s lows, however a dividend yield of 8.5% was always going to be vulnerable, particularly when dividend cover is significantly under covered.
Sometimes it pays to take a couple of steps back to move a business forward and in cutting the dividend, and reducing costs and debt the new management appears to be putting in place the conditions to place the company on a more solid foundation. A case of short term pain for long term gain. Even after the cut in the dividend the payout still remains at a fairly respectable 4%, which in the current low yield environment is still pretty good.
That being said the company still remains one of the most complained about in its particular sector and in terms of its broadband and TV packages it is playing catch-up with its rivals BT and Virgin Media after falling behind on its TV offering when it rebranded its Tiscali TV service a few years ago and didn’t initially offer PVR functionality.
While the focus will inevitably focus on its broadband offering, TalkTalk is not alone in offering a service that doesn’t tick all the boxes, and it could start by simplifying its various packages.
Sector peers BT Group and Sky aren’t that much better which probably explains why the TalkTalk has struggled to build its market share in the retail broadband market. Its share of the market is down 13% from 2015, and while price is an important factor the company has also suffered from reputational damage from the 2015 hacking attack, which it didn’t deal with particularly well.
If Charles Dunstone can address these issues then the company should be able to make inroads into its competitor’s market share, despite today’s profits warning, given the very low bar vis-à-vis customer service.
Judging by its performance in Q4, there does appear to be some sense of stabilisation after the company added 22,000 customers but that needs to continue in 2017, at a time when margins are likely to remain under pressure and competition remains fierce.
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