Talktalk Telecom Group plc’s (LON:TALK) founder Charles Dunstone has returned to the helm of the broadband provider this month, making his first job as chairman to slash the final dividend.
As the telecoms company reported a 3.0% decline in 2017 full year revenue to £1.7bn and warned on 2018 earnings, the final dividend was cut to 5.0p from 10.58p a year earlier. It brought the total dividend for the year to 10.29p, down from 15.87p in 2016.
The group also said it would be lowering its dividend again in 2018 to a total of 7.5p.
The news sent the share price down 10.84% to 162.72p in morning trade.
But analysts noted that the dividend yield, the ratio that measures dividends against the share price, was still 4.6% after the company’s proposed dividend cut and subsequent plunge in shares.
Cutting dividend the "right thing" to do, says analyst...
Russ Mould, investment director at AJ Bell, said Dunstone and new chief executive Tristia Harrison, have “done the right thing” in cutting the dividend as it frees up cash to invest in the business and tackle the company’s debts.
“Talk Talk’s 8%-plus dividend yield at yesterday’s close looked like it was in ‘too good to be true’ territory, especially as earnings cover for the pay-out was less than one times,” Mould said.
“But, the cut in the 2018 dividend to 7.5p (from 10.29p in the year just ended) is deeper than expected and that explains why the shares are receiving such harsh treatment this morning.”
The 8.7% dividend yield as of Monday was about four times the average of the European telecoms industry.
Dunstone has admitted that the yield was too high for a company that last year continued to see a churn in customers and less people signing up to use its internet services.
“When you looked at the yield we had, it was kind of insane,” he said in an interview with Bloomberg after the results.
“We wanted to invest in growth. I want to run the business with real financial discipline and reduce the leverage of the business.’’
TalkTalk expects to resume dividend growth once the business improves its earnings and reduces its net debt divided by headline EBITDA to 2.0x. The net debt/headline EBITDA fell to 2.57x in 2017 from 2.61x the prior year.
TalkTalk's turnaround plans...
Dunstone has a big job on his hands in turning around the business, which has been working to repair its reputation after a 2015 cyber attack.
TalkTalk was forced to pay a £400,000 fine last year for security failings that led to a hacker accessing the personal information of more than 150,000 customers.
The churn rate of broadband customers was 1.6% in fiscal year 2016 as the company continued to reel from the scandal. Churn improved to 1.4% in 2017 as TalkTalk made improvements to customer service.
However, the group still has a long way to go and expects to earnings to fall in 2018 as it invests in marketing and improving subscriber costs.
Underlying earnings (EBITDA) in 2018 is projected to drop to a range of £270mln-£300mln, compared to £304mln in 2017.
EBITDA in 2017 was 17% higher than a year ago, boosted by improvements in subscriber acquisition costs and £34mln of savings as part of its transformation programme, “Making TalkTalk Simpler”. But it fell short of analysts’ expectations of £311mln.
Revenue also missed forecasts of £1.8bn as on-net average revenue per user for the year fell 1.3%.
Fierce competition from BT, Sky and Virgin…
TalkTalk has suffered at the hands of tough competition but the company is not alone as the churn rate is typically high in the telecoms sector - even for the likes of rivals Sky, Virgin Media and BT, which offer attractive bundles that include TV subscriptions.
“The market remains fiercely competitive, as evidenced by a fresh 1.3% decline in average revenue per user (ARPU) and the profit warning for 2017-18 dished out by Dunstone today, which implies underlying profits could drop by up to 10% in the year ahead as Talk Talk invests heavily in winning new customers and improving its service,” Mould said.
Michael Hewson, chief market analyst at CMC Markets, chimed in: “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.”
TalkTalk a takeover target?...
Dunstone’s record shows that he has never been afraid to buy or sell assets and the company’s weaker-than-expected numbers may spark speculation of a takeover offer for TalkTalk.
Mould said it may “only be a matter of time before analysts start to ponder whether TalkTalk is a potential bid candidate”.
As the founder and former chairman of Carphone Warehouse, Dunstone oversaw its merger with Dixons Retail in 2014 to become Dixons Carphone. Then in 2015, Dixons Carphone sold off its German assets to MVNO Drillisch and offloaded its Dutch business, The Phone House Netherlands, to local owners.
Now Dunstone has stepped down as the Dixons Carphone's chairman to revive TalkTalk and the market will be watching his next move closely.
Dunstone has rejoined the company this month along with Harrison, who has taken over the reigns of chief executive from Dido Harding. Harrison was head of TalkTalk’s consumer business and a former marketing director at Carphone Warehouse.
The management shakeup also sees Charles Bligh move to the role of chief operating officer from managing director.