With current tensions in financial markets yet to impact on consumption behaviour within the ‘real economy’, it is possible that the telecoms and digital entertainment space may remain an area of interest for investors for at least a short while yet.
It is with this in mind that I thought I would take this morning to throw my own two pence into the melting pot of opinion on some of the industry’s incumbents.
Let’s dance
Bloomberg reported this week that Vodafone (LSE: VOD) and Liberty Global have reopened talks about asset swaps and the possibility of a joint venture in Europe.
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Given that differing opinions on the value of various business units and conflicting views over future strategy led to earlier talks of a tie-up being terminated, the fact that negotiations have been reopened underlines the strategic case for Vodafone and Liberty hitting the dance floor.
The European market as a whole has already begun a resolute move in the direction of multi-service communications and entertainment packaging, which is best observed in the UK by looking at BT’s push into pay-tv and Sky’s simultaneous expansion into mobile.
Vodafone has significant mobile assets across the continent, while Liberty Global is strong in cable tv, but both companies are yet to come up with a credible riposte to BT and Sky. Tying the knot could mean a brighter future for both companies, in both the UK as well as Europe.
Cautious outlook
Late January saw Sky (LSE: SKY) report strong revenue growth and record operating profits for the half year ending in December, with basic earnings per share were up 10% and the interim dividend 2% higher at 12.6p.
The shares have remained buoyant in recent months, along with those of BT, although some analysts now appear to be becoming more cautious in their outlook for Sky.
Of particular concern is BT’s expansion into pay-tv. Its balance sheet and commitment to becoming a leader in an evolving market mean that it is unlikely to just go away as a source of competition and Sky could suffer increasingly in future periods as a result of its ambitions.
While the majority of analysts still advocate holding on, both Berenberg and Liberum Capital have recently cut their ratings for the shares to sell, with price targets at 784p and 584p respectively.
Wolve at the door
TalkTalk (LSE: TALK) shares halved in value during 2015, mostly in response to concerns over margins and the spiralling cost of the data breach it reported earlier in the year. Nevertheless, management remained upbeat in their February trading update, holding up continued growth in customer numbers and market share as an ailment to investor’s concerns.
The problem for investors however, is that management have talked themselves into dividend commitments that they may not be able to meet. The Morningstar consensus estimate suggests that TalkTalk will pay 15p in dividends this year, while earnings per share are projected at just 11.05p. The same trend is evident across the forecast horizon.
Furthermore, increased competition has seen customer acquisition costs rising steadily for some time, which means adding more customers just may not be enough to keep the wolves from the door.
In short, TalkTalk will need considerable revenue, margin and customer growth during the coming quarters if it is to sustain its current payout, let alone honour its commitment to a “progressive dividend”.
