A Dividend to Beat BT

LONDON -- Telecom companies are becoming pretty strong dividend-payers these days, with BT Group (NYS: BT) and Vodafone offering about 5% to 8%. But both have very high debts amounting to a significant portion of their market cap, and BT still has that pension fund shortfall around its neck.

So how about a smaller telecom company that is also offering a high dividend but has a bit of growth potential in it, too?

I'm talking about KCOM  (ISE: KCOM.L) , which I've had my eye on for a while. Last year I was impressed by the performance turned in by the erstwhile Kingston Communications, which still runs those unique cream-colored telephone boxes in Kingston-upon-Hull. What I liked was the company's refocus away from low-margin simple services toward higher-margin business offerings, targeting profits rather than raw turnover.

Another strong set of results
And now, a year on, we've seen more of the same in KCOM's latest set of full-year results.

From turnover that declined by 2%, KCOM extracted a pretax profit of 51 million pounds, which is 55% higher than last year. That was partly due to EBITDA coming in 2.5% higher than last year, but the higher exceptional costs of a year ago inflated that figure as well, so we need to take that into account.

But it did feed through to a bottom-line-adjusted earnings per share of 7.4 pence against 5.6 pence last year, for a rise of 32%. Strong cash flow helped to keep net debt tumbling, too, and it ended the year at 75 million pounds -- down from 82 million pounds a year ago. For a company valued at 350 million pounds, that's really nothing to worry about, but further progress in reducing it would be welcome over the next year or two.

What about the divi?
The big expectations have surrounded the dividend, and we heard that shareholders are getting 4 pence per share, which is an 11% rise on last year's 3.6 pence and right in line with the company's stated aim of raising its payout by 10% per year.

That represents a 5.8% yield based on today's 69 pence share price, and it will rise to 6.4% next year if the 10% target is met again. The company sounds pretty bullish about that, saying, "The Board reiterates its commitment to delivering a minimum of ten per cent per annum dividend growth over the current financial year, reflecting its confidence in the Group's future cash generation and performance."

A nice performance
The share price hasn't really moved on the day of the news -- but then, there are no surprises, and everything has gone exactly as expected. But it's up 8% over the past 12 months, which is a nice gain, especially when the dividend is added in.

KCOM does have a small shortfall in its pension fund, but its net liabilities amount to just 13.9 million pounds. Eat your heart out, BT.

On the same day, KCOM announced that, after consultation with its largest shareholders, it will retain Bill Halbert as executive chairman. Mr. Halbert has been in the chair during one of the company's strongest spells, and his retention should boost confidence.

I remain convinced that KCOM is a solid and well-managed company and has plenty more investment potential.

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At the time this article was published  Alan does not own any shares mentioned in this article.Motley Fool newsletter services have recommended buying shares of Vodafone Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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