Sky
Sky (LSE: SKY) continues to deliver strong profit growth and attracts new customers against difficult trading conditions in Europe. Operating profit in the three months to the end of September increased by 10% to £375 million, with revenue gaining 6% to £2.8 billion.
Although Sky has made a strong start to the year in delivering continued growth in earnings, there are signs that the company’s growth is not as robust as previously anticipated. Sky faces growing competition from local rivals, and this is particularly true for the paid TV market, where spending on sporting rights and entertainment content have been soaring.
Intense competition from its rivals is also starting to have an impact to Sky’s top-line growth. Although Sky’s churn rates remain historically very low, the churn rates in Italy, Germany and Austria are beginning to rise. ARPU, average revenue per user, has been flat in the UK, whilst it has been falling in Italy, Germany and Austria.
With the company facing both top-line and bottom-line pressures, Sky’s valuation could come under pressure. And in my opinion, this is not helped by Sky’s rather pricey valuation, whose shares currently trade at a forward P/E of 17.6 and yield 2.9%.
BT
BT Group (LSE: BT-A) has the potential to be a fierce competitor for Sky, because of its size and the increasing availability of its superfast broadband service. But so far, BT remains a small player, with less than 1.2 million customers. The recent winning of the rights to broadcast matches of the Champions League could help to boost new customer signings, but BT is far away from challenging Sky’s dominance in the paid TV market.
Although BT will find it difficult to break into the paid TV market, its outlook on earnings remains positive. Operating costs and capex have been steadily falling, and take-up for its superfast broadband remains robust. Free cash flow has improved considerably, and now covers its dividends by more than three times. So, although shares yield just 2.8% now, there is plenty of potential for future dividend growth. And, this is why BT shares look like a long-term buy.
Countrywide
Shares in Countrywide (LSE: CWD), the UK’s largest estate agency chain, have fallen by some 20% since June this year. But I reckon the fall in the value of its shares is overdone. Countrywide’s shares now trade at 12.9 times its expected 2015 earnings, while it has a prospective dividend yield of 3.3%.
Operating profits fell by 61% in the first half of 2015, following a decline in property transactions in anticipation of the general election in May. But we are already beginning to see the green shoots of recovery, with an increase in property listings and continued rise in property prices.
Legal & General
Legal & General (LSE: LGEN) is an attractive stock for dividend investors. The company has delivered five consecutive years of dividend increases, and in those five years its dividends have grown by a compound annual growth rate (CAGR) of 24.0%.
Dividend growth is slowing, but Legal & General still manages to grow its dividends faster than many of its peers. Most recently, its 2015 interim dividend was increased by 19.0%, to 3.45p per share.
The company does face some near-term headwinds, though. New Solvency II capital requirements, which are set to be introduced in January 2016, will likely require Legal & General to carry more capital because of its sizeable bulk annuity business. And, if forced to hold more capital, the company would find it more difficult to expand and grow its dividends.