Down 12%, this FTSE utilities provider is 31% under its ‘fair value’ and has a forecast dividend yield of 6.5%!
FTSE utilities provider Telecom Plus (LSE: TEP) has drifted 12% lower from its 24 June 12-month high of £21. This seems to have resulted from a drop in revenues in its 24 June full fiscal year 2025 results, to £1.838bn from £2.039bn. I also think it comes from profit-taking after a bullish price run since February.
Otherwise, 2025 saw a record adjusted pre-tax profit of £126.3m. This marked an 8.1% year-on-year increase, while adjusted earnings per share rose 9.4% to 119.2p.
These results enabled the firm to increase its dividend by 13.3% to 94p per share â another record.
And a further record was broken in the number of customers now served by the business. Following a 15% surge over the year, this now stands at 1.163m. This rise included around 25,000 fixed-line/broadband customers acquired from TalkTalk.
Mobile services are just one of the Telecom Plus five main businesses, which all fall under the trading name âUtility Warehouseâ. The others are energy, broadband, insurance, and cashback cards.
The company expects another 15% growth in customer numbers in 2026. It is targeting two million customers and more over the next three years. And it forecasts adjusted pre-tax profit to be within a range of £132m-£138m.
So howâs the share valuation looking?
There is a difference between a stockâs price and its value. The former is whatever the market will pay for it at any point, while the latter reflects underlying business fundamentals.
In my experience, being able to accurately quantify this price-value gap is the key to big long-term profits. This experience comprises several years as a senior investment banker and decades as a private investor.
The best method I have found to do this is discounted cash flow (DCF) analysis. This identifies where any stock price should be, derived from cash flow forecasts for the underlying business.
The DCF for Telecom Plus shows it is 31% undervalued at its current £18.57 price.
Therefore, its fair value is £26.91.
A risk here is that its earnings â which power any firmâs share price and dividends â will be affected by intense competition in its markets.
However, consensus analystsâ forecasts are that Telecom Plusâ earnings will grow by 8.3% a year to end fiscal-year 2028.
A high dividend set to go higher
The stock currently pays a dividend of 5.1%. However, analysts forecast this will rise to 5.6%, this year, 6.1% next year, and 6.5% in 2027.
So, investors considering a holding of £11,000 (the average UK savings) in the stock would make £10,034 after 10 years.
This is based on an average 6.5% yield and on âdividend compoundingâ being used.
After 30 years on the same basis, this would rise to £65,910. By that stage, the total value of the Telecom Plus holding would be worth £76,910.
And that would pay £4,999 a year in dividend income at that stage!
Will I buy the stock?
My overall portfolio is nicely balanced right now with a mix of top growth and dividend shares.
And I am of the âif it ainât broke, donât fix itâ view of investing.
However, if any of my growth or dividend shares started underperforming, Telecom Plus would be a leading contender to fill the spot.
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Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
