FTSE 350: More regulation for telcos?

The CMA has made recommendations to the Financial Conduct Authority and Ofcom, the UK’s communications regulator – including the recommendation that mobile providers must stop charging pay-monthly customers the same rate once they’ve paid off their handsets at the end of their contracts. Generally, the CMA noted that “urgent action is required”.

Also in December, Ofcom announced a review into broadband companies’ pricing practices – considering why some customers pay more, and whether vulnerable customers need extra protection.

Clearly, the listed telecoms sector continues to operate against a complex regulatory backdrop. Still, in a note on BT (BT), broker Numis said it believes Ofcom might take some action regarding mobile handsets, but SIM-only prices “may well also inch up to compensate for this”. Otherwise, “on a worst case scenario”, it thinks the risk to BT is an approximate £100m hit to earnings before interest, tax, depreciation and amortisation (Ebitda), less than 2 per cent of the group total. This number is based on Ofcom’s 2018 pricing trends report, which estimates UK mobile consumers might be overpaying by around £330m each year. Numis also believes Ofcom won’t take meaningful action regarding fixed broadband pricing practices.

In any case, regulation is clearly a factor to monitor for both BT and the broader peer group. But there are also questions around the sustainability of some telcos’ dividends.

BT is one company whose dividend plans could be a stretch, given investment plans and other potential cash flow requirements. Still, it’s one of our 2019 Tips of the Year – albeit a contrarian play.

Challenges facing the group have included, among others, an accounting scandal in Italy, an historically tricky relationship with Ofcom, rising competition, sizeable net debt and a significant pension deficit. Such problems tied into our earlier sell tip in February 2018. But incoming chief executive Philip Jansen – who joins from digital payments giant Worldpay (US:WP; UK:WPY) – has experience in transforming complex businesses. And the half-year numbers to last September were relatively encouraging. Moreover, economic uncertainty might enhance the appeal of telecoms as a defensive sector.

Meanwhile, Vodafone (VOD) held its dividend flat at 4.84ȼ within November’s interims, and anticipated a stable full-year dividend of 15.07ȼ – even while its acquisition of Liberty Global’s cable assets has contributed to its debt pile. There could be dividend increases in the long term, once leverage reaches the lower end of its target net-debt-to-cash-profits range.

A caveat: Vodafone’s third-quarter trading update is due on Friday 25 January – after this magazine goes to press. Ahead of this, Numis said that, based on the past, “some may [again] interpret [probably] still weak service revenue growth” to mean the dividend per share is at risk. But the broker strongly disagreed. And while there are spectrum auctions coming up, Numis didn’t believe the auction in Germany would raise its average cash spectrum spend.

In its March 2018 preliminary numbers, Inmarsat (ISAT) reduced its annual dividend – partly to ensure it had the financial resources to capitalise on opportunities within the in-flight connectivity market. It said this was expected to stay flat until its cash flow rebuilt sufficiently. While prospective buyer EchoStar ultimately decided not to make an offer for Inmarsat, we think it could still tempt a brave bidder. Something to watch for in 2019.