Talktalk Telecom (LSE: TALK) and Vodafone (LSE: VOD) are two of the market’s most defensive companies. Both companies have a steady growth outlook, trade at reasonable valuations and support attractive dividend yields, which look safe for the foreseeable future.
However, Talktalk and Vodafone have underperformed the wider market during the past three months, although this is necessarily a bad thing. Indeed, after recent declines the two companies are now cheaper than they have been at any point during the past 12 months.
Growth slows
Talktalk’s shares have slumped by around 28% during the past three months, following management’s revelation that demand for the company’s services was “softer than we have seen in recent quarters, with higher promotional activity in the sector”.
The high level of promotional activity is a direct result of a price war between Talktalk’s larger peers, Sky and BT. Unfortunately, as a consequence of this price war, Talktalk’s sales are already coming under pressure. The group announced back in July that second-quarter revenue only expanded 3.5% year-on-year, below analysts’ forecasts, which were calling for growth of 6.5%.
Still, the company remains confident that it can deliver full-year revenue growth of 5%. Further, management expects revenue to grow at 5% per annum from 2017 onwards. The group is also targeting an EBITDA margin of 25% by 2017.
Additionally, City analysts believe Talktalk can grow earnings per share by 77% this year, as actions to cut costs take effect and profit margins expand. Moreover, Talktalk’s earnings are expected to expand 49% during 2017.
And based on these forecasts, Talktalk’s shares are trading at a 2017 P/E of 12.9. The company currently supports a dividend yield of 4.6%, and the payout is set to increase by a third during the next two years. These projections indicate that Talktalk’s shares will support a yield of 5.9% during 2017.
Sluggish growth, hefty yield
Vodafone’s key strength is the company’s cash flow. While growth remains elusive, Vodafone’s cash-generative nature has earned its reputation as one the FTSE 100’s biggest dividend payers. The company currently pays out almost all of its profits to investors via dividends.
What’s more, as Vodafone’s European investment programme comes to an end during the next few years, the company’s free cash flow will only increase, freeing up more cash, which can be returned to investors.
Initial figures show that Vodafone’s multi-billion pound investment in its European telecoms infrastructure is already starting to pay off. During the first quarter of this year, Vodafone’s group service revenue grew 0.8%, which was better than many analysts had expected and put a stop to years of service revenue declines. Also, Vodafone reported that during the quarter customer contract churn in every market has fallen to new record lows. Additionally, full-year data traffic is now set to grow at a very healthy rate of more than 60%.
As a result of these impressive figures, some analysts are already forecasting that the company will announce sizable dividend hikes in the near future. Vodafone’s shares currently support a dividend yield of 4.9%.
