KCOM Group’s dividend yield is currently more than 6%. That makes it attractive, but it also puts it squarely in yield trap territory.
For a high-yield stock, KCOM is interesting because it’s a company of two halves.
The first half can trace its origins back to the early 20th century, where it started out as the council-run Hull Telephone Department. This is a defensive but declining business, providing fixed-line telephone and internet services to the people of Hull and East Yorkshire.
KCOM’s other half is an internet services business, helping large organisations with complex and long-term internet-related projects. This business is far less defensive, far more cyclical and far more likely to generate long-term growth.
The question for KCOM’s high dividend yield is this:
Can the cyclical internet services business grow fast enough to offset the declining fixed-line business?
And even if it can, will the cyclical nature of that business undermine KCOM’s dividend, just when the yield is at its most attractive?
These are hard questions to answer with any degree of certainty, but you can find out what I thought of KCOM in the May issue of Master Investor magazine.