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Should you hold onto your shares in FTSE 250 listed utility provider Telecom Plus?

James J. McCombie
Saucepan on a gas hob

I thought that shares in Telecom Plus (LSE: TEP) might do well when I looked at the company in August of this year and bought them a few weeks later. In that month we were told UK GDP had contracted by 0.2% in the second quarter, prompting fears of a technical recession, and fears of a hard Brexit were rife.

Telecom Plus, being a provider of bundled utilities to UK customers had, in my opinion, the potential to navigate troubled waters.

The UK did not experience a recession, and Brexit was delayed, but business and consumer confidence are still sagging, and we have a pivotal election to get through next month. Meanwhile, shares in Telecom plus chopped around for a bit, but are now around 10% higher than the 1,204p on offer when I first looked, and have outperformed the FTSE 250, which made a 6% gain over the same period.

Keeping customers happy

Part of the case for investing in Telecom Plus is that they don’t fight to acquire customers with unsustainable introductory prices. Instead, customers are offered fair long-term pricing on bundled services offered through the Utility Warehouse brand. Loyal customers and non-discretionary revenues make the company resilient to downturns.

Today, Telecom Plus released its results for the six months of the financial year that ended in September. Half-year revenues are up year on year by 13.6% and customer numbers have grown by 10,267 to 645,306. Levels of customer churn are much lower than industry averages – 12.5% versus 20% – which validates the recruitment and pricing approach Telecom Plus uses.

The company’s operating profit still covers its interest obligations impressively, at 26 times over for the half-year. Quite a change in fortunes would be needed before it struggles to pay. A strong balance sheet and long-term customer loyalty have seen Telecom Plus prosper when 25 other independent energy suppliers have exited the market since 2018.

Aside from providing utilities, Telcom Plus recently launched a boiler installation division, which is on track to deliver a profit for the full year. Home and boiler insurance policies written were up by 50% year on year, and have 95% renewal rates.

Investors seem happy with the top-line performance of 9.2% year-on-year growth in six-month profits. The share price had risen a little over 3% to 1,325p per share by lunchtime today.

Loyalty penalty

Ofgem has recently lowered the price cap on energy bills, which could mean increased prices for regular switchers, and reduced ones for those that don’t: this plays right into Telecom Plus’s hands as it makes their model, which rewards loyalty, even more competitive.

We now have to talk about dividends, which accrue to loyal shareholders. I thought a dividend cut might be on the cards but Telecom Plus has increased its interim dividend to 27p and wants to pay 57p per share for the full year 2019, which would give a decent forward yield of 4.3%.

But total payouts are greater than the booked profit, retained earnings are being nibbled away, and borrowing is increasing, which is not sustainable so I may be right eventually about that cut.

I think Telecom Plus is a good company, with a recession-resilient model so I’d say hold onto your shares for now. I wouldn’t buy at this price: I worry about a dividend cut and the risk of Mr Corbyn’s plans for the energy sector.

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James J. McCombie owns shares in Telecom Plus. 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