The Must-Own Sector For Rising Dividends

Published in Investing on 1 June 2012

Top cash cows from large, mid and small caps.

Over the past decade, there has been a sea change in the telecoms sector, and we're seeing a strong move towards regular and growing dividends, with 4, 5 and 6% yields becoming the norm.

That's a big change from the nineties and the early noughties, when it was very much a growth story, and pumping every possible pound into "jam tomorrow" investment was the order of the day -- like the £22.5bn spent on UK 3G licences.

But superfast broadband and efficient mobile computing are mature commodities these days, and the business has changed accordingly.

The free Motley Fool Report "Top Sectors Of 2012" covers three strong sectors for investors in the current economic climate, and I reckon the telecoms sector is vying for a place alongside them.

So who's paying out the big dividends?

The FTSE 100 giants

In May, BT Group (LSE: BT-A) released full-year figures, and the things that stood out as highlights were cash flow, debt and dividends. Net debt actually rose by £266m, but that was after making a £2bn pension deficit payment -- so that's being tackled, and its risk is receding.

But the biggest news for me was the dividend, and it was very good to hear it had been hiked by 12% to 8.3p per share.

But there was even better news in the shape of forecasts for future payouts. The board now expects dividends to grow by 10-15% annually for the next three years and, even at the lower end, that means a yield of 4.4% on the current price of around the 205p level.

That's not guaranteed, of course, but it shows both a commitment to rewarding investors, and confidence in the future.

Vodafone (LSE: VOD) is no different. The key point for me in its recent results announcement was a 7% rise in its ordinary dividend. At 9.52p per share, it represented a 5.6% yield on the day's price of 168p, rising to 6% on next year's forecast.

And that forecast should be achieved, as the company that pays out more cash each year than any other listed in the UK reiterated its target of 7% dividend growth per year. That aim was first issued as a three-year strategy in May 2010, and for the 2013 year the board is expecting to pay out no less than 10.18p per share.

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Two mid-cap players

The smaller FSTE 250 telecoms companies are playing the same game, too, and when KCOM (LSE: KCOM) delivered its full-year results a couple of weeks ago, its focus was also on dividends.

The company has a stated aim of raising its dividend by at least 10% per year, and it did that again quite comfortably. In fact, at 4p per share, it managed an 11% rise on the previous year's 3.6p, for a yield of 5.8% on that day's share price of 69p.

Strong cash flow was there, too, helping get year-end net debt down to £75m. In proportion to KCOM's market capitalisation, that's much better than either BT or Vodafone.

If we have a look at Telecom Plus (LSE: TEP), the firm that trades as Utility Warehouse to sell fixed line, mobile telecoms and broadband, bundled with electricity and gas, we see the same thing.

The firm, which has an unusual and very cost-effective marketing model, is a bit different from the others in that it has focused on organic growth, cash flow, low costs and low debt right from its founding.

Full-year results released in May revealed a total payment of 17p per share, which is a massive rise of 23% on 2011's dividend. It did only represent a yield of 2.5%, but the long-term aim is to grow that dividend year-on-year. Telecom Plus doesn't have a specific dividend target, but did say: "We anticipate further increases in dividends in future as our earnings continue to grow."

And even the tiddlers

And then we have AIM-listed Alternative Networks (LSE: AN), which is still a small, growing company with a market capitalisation of less than £130m. Between 2007 and 2011, it grew its turnover from £72m per year to £117m and pre-tax profit from £8m to a forecast £15m for this year.

Is it reinvesting all of its profits in growth, like the telecoms tiddlers of old? Not a bit of it. The dividend has been lifted year upon year, and there's a 10% hike forecast for this year, which would take it to a yield of over 4% on its price of around 265p.

The telecoms industry knows that the punters don't want risk these days, and are after serious dividend income -- and the cash cow is grazing and getting fatter. That's good news for long-term Fools.

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> Alan does not own any shares mentioned in this article.

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Comments

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WarrenBuffer 16 Jun 2012 , 5:57pm

Not sure I'd want to invest in BT with a net debt of 783% !!
At leat Voda's net debt is only 31%. . . that's where my money is right now.

WB

eccyman 19 Jun 2012 , 11:39am

#WB

Not sure where you get BT's net debt of 783% from?

Net debt is £8.8bn, capitalisation is around £16bn..

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