You may have seen on Twitter that I bought another chunk of Telecom Plus (TEP) for my Income Portfolio ISA this morning, at a price of 1218.28p. I will just do a quick Rationale today - I suspect many readers are already aware of TEP so I don’t think there is a huge need for me to go into too much detail.
I bought about 1% of my Overall Portfolio Value (this includes everything, this is not just a % of the Income Portfolio) and TEP is now about 4% in Total - so one of my biggest positions, and very much a Long Term Hold.
TEP operates a brand called ‘The Utility Warehouse’ which provides Telephony (Fixed and Mobile), Broadband, Gas and Electric to consumers and charges for them on a Single Bill. They claim to have very competitive prices and customers do seem to be signing up in their droves.
This is partly driven by a fairly unusual Sales Model - ‘Distributors’ sign-up customers and the Distributor receives a small ‘Royalty’ on all the New Customer’s future bills - so Distributors can build up an ongoing Revenue Stream. TEP has been operating this way for certainly more than a decade that I know of, and their success is clear to see.
TEP also has a small subsidiary called TML, which supplies fixed line telephony to SME businesses through authorised resellers and dealers; and they have a subsidiary called Opus Energy which supplies businesses with Gas and Electric.
In the recent results from a couple of weeks ago, they announced that in future they intend to start offering Water provision once the Government opens up the market and also Home Insurance, Car Insurance and Boiler Cover - these new areas could provide even more growth.
Despite many years of growth at a pretty decent rate, TEP still only has about 1% of the overall Utilities market, so there is plenty for them to aim at. The growth can come in several ways - growth in Households served, increasing Services per Household and growth in Business stuff.
Charles Wigoder, the Chairman, holds 12,933,683 shares which is worth about £155m !! I wouldn’t mind his Divvy Cheques !!
I have been in and out of TEP for years and it always seems to deliver. There was a hiccup about 8 years ago or so, when it was a much smaller company, when they messed up on Gas pricing and got horribly caught out. Soon after that, they had the good sense to sign up to a deal with Npower (I think it was them) whereby they effectively were hedged against movements in the Gas price.
As with any stock, if they fail to miss forecasts then that would cause a drop in the Share Price - but this is a problem with ALL stocks - so not a reason to avoid TEP. The company has a superb record of delivery and this is backed up by the increases in the Dividend which have happened for as long as I have known them.
In this sector, Political Risk is endemic. However, it is likely that any changes to Regulation would be more to the detriment of the ‘Big 6’ Energy Suppliers and, if anything, it might help the smaller players like TEP. It is a risk, but I think it is relatively minor. In addition, Ed Miliband’s Labour Party seems to be struggling and normally Labour voting Scots are switching to SNP - this makes a Labour Majority very difficult to achieve. Natural bedfellows for a Coalition of the Left would be the Lib Dems - but their Vote has collapsed and it will be a struggle for them to have any seats at all in the Next Parliament.
Someone pointed out to me recently that they have an Auditor that is fairly unknown - this could be a Risk and something to be aware of. I am not overly concerned as the record of the Dividend is superb and if there was much Accounting Trickery, there would not be the cash to pay it. In addition, even the Big Auditors seem to be useless at spotting Fraudulent companies, so having a well known Name is not necessarily a guarantee of safety.
Valuation and Targets
TEP is not a cheap share (I am talking in p/e terms here) - but it is one where the term ‘Reassuringly Expensive’ could justifiably be used. Sometimes you just have to pay for quality.
EPS for 2015 (current Financial Year) is 64.05p. At my Buy Price of 1218.28p, that is a forward p/e of 19.
EPS for 2016 is 75.37p. At my Buy Price of 1218.28p, that is a forward p/e of 16.
ShareScope has no forecasts for further out which surprises me a bit - this is a FTSE250 company with a Market Cap of £973m ish - so you would think Analysts would have some more numbers………..
It wouldn’t take a lot of imagination to see 80p of EPS for 2017. If this is hit, you are talking a forward p/e of 15.
So, the p/e is not cheap by any means, but it is certainly not a crazy overvaluation and this stock is more about Growth and the Divvy - on this basis, it looks superb.
ShareScope has divvy payouts of 40p for 2015 and 47.5p for 2016 - this means Dividend Yields of 3.3% and 3.9% at my 1218.28p Buy Price.
But Divvy Growth is key here - it seems to me that 52p of Divvy must be possible in 2017 and this is a conservative figure. If it happens, then I get a Divvy Yield of 4.3%.
There is a Debt Position of £84.8m, which does not seem too much of a concern in the context of Pre-Tax Profits around £75m and the steady and predictable nature of their Cashflows.
Bearing in mind the aspiration to almost double the number of Households served, it seems highly possible to me that in maybe 3 to 4 years time the EPS could be up to 100p. Put this on a p/e of 20 (yes, Punchy I will admit) and you get a target of 2000p. This almost coincides with the Peaks back at the end of last year and early this year, so it seems very possible. Of course, if we can see the Price breakout about the Strong Resistance that now holds sway at 1950p ish, then it could run much higher. We shall see, but in the meantime, I bank those lovely Divvys.………
The Standout factor here is a Long Term Uptrend since about 2006 which peaked out around 1950p at the end of 2013 and the start of 2014. Since then it has fallen back 37.5% from the Peak to today’s 1218.28p.
It would be very fair to make the point that it is still in a Downtrend Channel since that Peak, and it is arguable that I have gone in too early. However, I think the fairly generous Divvy will provide a lot of support - people will be attracted to that Payout around 1200p and it is notable that Support kicked in at 1169p on 11th July 2014. There is a strong liklihood that this will act as support again.
I have noticed in the last month how the Share Price has slid back from a High around 1450p and the ‘Down Wave’ seems overdone now and the RSI is reading just over 30 and the Price seems to be ‘basing’ - as witnessed by Small White Daily Candles in a tight trading range for the last 4 days. As mentioned above, my main focus is the Dividend and I wanted to move in now and snap up the 4% yield.
TEP just seems an ideal stock for a Long Term ‘Buy and Hold and Forget about it’ Portfolio. If all goes to plan, then it should deliver a healthy divvy near 4% which should grow year after year. This will ensure I get a good Income Stream from the stock and it should mean Capital Growth as well - what more can you ask for?
The Growth is a key factor with TEP - they currently service 565k Households in the UK and have a “medium term target” to hit 1m Homes - so the growth plan is obvious, and it seems possible.
My Income Portfolio aims for a Blended Dividend Yield of 5% - so TEP fits in well with a good yield and provides a decent Capital Growth element to the Portfolio if all goes to plan. This balances some of the more ‘Defensive’ and boring holdings and should give a bit more spice.
In addition, it is worth pointing out that Robbie Burns (www.nakedtrader.co.uk) has an enormous position in these and has done for years. I seem to recall that on one update last year he hinted he had about £600k in them !! He is a Distributor for them and his record of shrewd Stock Picks speaks for itself.
Here’s to many years of juicy divvys !!