So, after many months of wrangling, BT Group (LSE: BT.A) and telecoms regulator Ofcom have finally agreed to make the company’s Openreach infrastructure division a legally separate business. Openreach builds and maintains the vast network of copper and fibre cables that run from telephone exchanges to millions of homes and businesses across the country. The new company, Openreach Limited, will have its own branding and won’t feature the BT logo.
Greater independence
It’s hoped that once the new agreement is implemented, Openreach will have greater independence under its own board of directors. The news will go some way to alleviating concerns from rivals such as Sky, TalkTalk and Vodafone, that they were operating in an unfair marketplace, with BT making decisions about Openreach to benefit its own retail business.
So how will this affect the share price? Many believe that BT has dodged a bullet. The regulator could have forced the group to hive off Openreach completely, and investors should be pleased that a full separation has been avoided. BT has argued that a full break-up of the company would lead to additional disruption and higher costs.
Recovery has begun
So what now? Last month I argued against selling BT following the Italian accounting scandal and subsequent profit warning. The share price had collapsed, but I believed that the sell-off was overdone and it was worth hanging on for a long term recovery. With BT now trading almost 10% higher, I think that recovery has already begun.
I’ve never really rated BT as an income stock, with its yield ranging between 2.8% and 3.2% over the last three years, but now I’ve changed my mind. The January profit warning and resulting share price collapse has bumped up the yield to 4.6%, rising to 5.6% by FY2019. Shareholder payouts have actually been rising steadily since 2009 and I expect this to continue. I believe that with an undemanding forward P/E ratio of 11.9, the share price should easily recover to £4 and beyond.
Internet of Things
Another London-listed telecoms firm I’m rather bullish on at the moment is Telit Communications (LSE: TCM). Currently valued at just £375m, AIM-listed Telit is certainly dwarfed by the mighty BT Group’s £32bn market capitalisation, but that just means there’s more scope for growth. The group’s competitive positioning and global reach enabled it to achieve double-digit growth in 2016, with its Internet of Things (IoT) services unit reporting an impressive 36.5% increase in revenue.
The IoT market is rapidly gaining momentum across an increasing number of businesses around the world and, with its unique end-to-end IoT solution capabilities, Telit is very well positioned to profit from these opportunities. With a surprisingly modest P/E rating of 15.6 that drops to just 10.8 next year, I believe Telit is a ‘buy’ for the rapidly growing IoT market.