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Questor share tip: Buy KCOM's 5.7pc dividend

Telecoms group offers a 5.7pc forecast dividend yield that is forecast to grow by double digits, says Questor

The company said yesterday that trading was in line with expectations making the shares worth considering for income alone.
The company said yesterday that trading was in line with expectations making the shares worth considering for income alone.

KCOM
95P +1.5
Questor says BUY

HULL-based telecoms group KCOM [LON:KCOM] provides investors with a healthy forecast dividend yield of almost 6pc, which management plans to increase by 10pc next year. The company said yesterday that trading was in line with expectations making the shares worth considering for income alone.

The East Yorkshire-based telecoms group provides telephony and broadband services to homes and businesses in the area. The company has a strong regional brand, formerly known as Kingston Communications, and has been in business since 1882 when it operated a telegraph system. The company was listed in 1999 and recently dropped out of the FTSE 250.

The company said in January that it had been named preferred supplier for a substantial contract with a government department. This should help support the full-year numbers for next year. Market consensus is for pre-tax profits to slip marginally to £48m, on revenue flat at £370m.

Telecoms companies have stable revenue and cash generation as customers tend to renew fixed line and broadband packages with the same provider. In its results for the year to March, announced yesterday, KCOM reported revenue down 0.6pc to £371m and pre-tax profits up 6pc to £50.5m.

But the numbers that caught Questor’s eye were in the detail of the cash flow. KCOM is attractive to investors in no small part because it generates plenty of cash. The company made £67m in free cash flow last year - up from £46m a year earlier - meaning that the £24m paid out in dividends was covered almost three times.

Net debt was also reduced to £75m last year, from £88m a year earlier, and the company’s overall debt position was made more secure by refinancing a £200m borrowing facility until 2019.

KCOM is certainly not a growth stock, but with the shares rated on 12.6 times forecast earnings it doesn’t really have to be. The company also has very little to do to hit analysts’ targets.

KCOM’s strength is its cash generation in which it has a proven track record. Questor thinks the shares are a buy for the dividend alone.