TalkTalk Telecom Group (LSE: TALK) has been anything but a bright growth share in recent years. In fact, the broadband supplier was lossmaking only a couple of years ago as intense competition smashed the top and bottom lines.
Still, having bounced back into the black last time out City analysts expect the bottom line to truly rip higher — in the years to March 2020 and 2021, the FTSE 250 firm is predicted to print earnings rises of 75% and 24% respectively. And these predictions mean TalkTalk provides plenty of value, the firm carrying a sub-1 forward price-to-earnings growth (PEG) ratio of 0.3.
Too much risk?
Despite this, TalkTalk is still a share I’m not prepared to countenance buying for even a second. Those intense competitive pressures remain as troublesome as ever, the business recording a 4% revenues drop in the six months to September to £792m.
With rivals such as BT and Sky continuing to discount like it’s going out of business, TalkTalk may have to bite the bullet and follow suit, putting its growth prospects in the near term and further out under intense pressure.
A cutthroat marketplace isn’t the only reason I’m worried about the telecoms giant as we move into a new decade however. The company advised earlier this month that talks to sell off its FibreNation arm — a unit set up a year ago to roll out fibre to 3m homes and businesses – remained “ongoing”, though Labour plans to bring BT’s Openreach division under state ownership could throw an enormous spanner in the works.
And judging by the state of TalkTalk’s balance sheet, the company needs the deal to go through without hindrance. Its already-imposing net debt pile of £760m in September 2018 had ballooned to £1.04bn just 12 months later, reflecting its move to a new headquarters, as well as the cost of investment in FibreNation.
More dividend cuts
The perilous state of TalkTalk’s finances has caused it to chop down the annual dividend twice in as many financial years, culminating in the total reward of 2.5p per share in fiscal 2019. Whilst City brokers expect the shareholder reward to be maintained at this level through the next couple of periods I’m not convinced.
Those anticipated dividends are covered twice over (or more) by predicted earnings through to the close of next year, readings which on paper should give investors ample peace of mind. Any reading of 2 times or more is usually considered to be safe-as-houses.
But my fears over those earnings projections falling flat gives me little reason to buy into that coverage. Sure, headline EBITDA swelled to £140m between April and September from £101m a year earlier, but the need to keep slashing the prices of its packages puts hopes of more impressive bottom-line growth in some danger.
I believe there’s many, many better growth shares to buy today with much less risk than TalkTalk.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019