IT USED to be called the World Wide Wait, but broadband has made surfing the internet a pleasure. It costs a bit more than an old-fashioned dial-up connection but people clearly think it is worth paying more to end the frustration of net delays. More than 5,000 Britons are signing up every day and most rely on BT’s network.
For BT, meanwhile, broadband is crucial. These days the typical BT customer spends a little over £22 a month on his or her home phone. If BT can sell a customer broadband too — at a cost of between £20 and £25 a month — then the company can double its consumer revenues, which are a third of its business.
However, there are threats. The first worry for BT is whether it can hold on to the custom. Since the company has been competing with, and beating, cable operators for the best part of a decade, there is ground for confidence here. But there is the newer threat in the shape of firms that rent BT lines and provide their own service. Arrivistes cut BT’s take in half.
These operators, such as Centrica’s One.Tel and Carphone Warehouse’s TalkTalk, are biting into BT’s traditional revenues. They fell 6 per cent in the fourth quarter of last year. After a long period of stability, BT is also losing share of the residential voice market. In the past 12 months it shrank from 73 to 69 per cent.
That is unsettling, but there is more to fray nerves. Earlier this month Ofcom, the regulator, forced BT to open up access to the last mile of its network to its competitors. To make anything of the change, BT’s rivals will have to make heavy capital investment, but if they do they could get hold of a line by paying as little as £1 a month to BT. Worse still, it is gradually becoming possible to operate a full telecoms service over a broadband connection, meaning that consumers can bin their traditional phone connection entirely.
If BT can dominate the provision of broadband telecoms services to UK consumers, its future should be assured. Helped by revenues from its burgeoning computer services activities, it has the capacity to replace waning old income streams with vibrant new ones. BT is making a better fist of the challenge than many counterparts on the Continent. The 4.7 per cent dividend yield also provides comfort. But big question marks remain over the long-term prospects. Hold.
National Grid Transco
NATIONAL Grid Transco is a utility with a growth profile that is decidedly unlike most of its peers. It is paying a dividend for last year 15 per cent higher than the year before. Moroever, it has promised to progress the dividend by at least 7 per cent a year until 2008. It might be assumed that investors would chase this sort of dividend income growth. It is at least as good as the average that might be expected from all FTSE 100 firms. Yet NGT shares are relatively cheap. They offer a dividend yield that is 50 per cent more than the typical blue chip. Yes, one might expect that, because it is the way of the investment world. But investors appear oddly unconvinced that NGT will sustain an ability to increase returns in the way it says it will.
Shares slipped even yesterday as the firm posted results that suggest it is fulfilling its stated ambitions with aplomb. The 104 per cent leap in pre-tax profits was aided by the absence of telecom-venture mistakes, which are now firmly behind the company. But strip that away and you will see evidence that NGT is running its assets with consummate levels of efficiency.
To secure the kind of growth required, NGT has to acquire other underperforming assets and reform them. It also needs to sell on utility assets which it has reformed in order to raise the cash needed to make the acquisitions.
At both ends of the process, NGT faces challenges. European opportunities to buy utility assets of the sort required to fuel NGT’s strategy are practically non-existent. There are openings in North America, but they are not coming about as quickly as might be hoped. NGT is also taking its time selling its reformed local gas distribution networks. If and when they come, the sale proceeds could be at least £4 billion and that will give it plenty of acquisition ammunition. But completion may not come until next year.
Shareholders should anticipate ultimate success, however. Patience is required, but NGT has a well thought out and workable strategy which can feed the delivery of the generous dividends. Buy.
SABMiller SHARES in SABMiller, the brewer, trade at a premium to its peers when judged in relation to dividend yield. Where Diageo and Allied Domecq, its closest London listed rivals, give dividend yields of 3.8 and 3.5 per cent respectively, SABMiller offers 2.9 per cent. Yesterday’s results show why.
Admittedly the reported growth was aided by a couple of one-offs. Changes in the value of the South African rand versus the dollar flattered. The popularity of the Atkins diet also helped sales of Miller Lite because it is beer that, like Atkins- approved foods, is low in carbohydrates.
The acquisition of Miller in 2002 fed a one-off expansion in profits but there is impressive underlying growth coming through at Miller as well. The organic growth in operating profit, in constant currency terms, in the US business was 28 per cent.
Growth across the group was almost as good, at 22 per cent. Crucially, the healthy trading performance is being turned into hard cash. The inflow from operations was 46 per cent higher and the dividend outflow to investors climbed 20 per cent.
If SAB wins control of the Harbin brewing assets in China, investors can look forward to more good growth.
SAB has a formidable rival for the Harbin assets in the shape of Anheuser-Busch so success cannot be taken for granted. But if it fails to land Harbin, SAB’s expansion record over recent years suggests that it could identify and draw value from alternatives. Buy.
