A provider of telecommunications and budget internet services, M2 Group Ltd (ASX: MTU) is one of the fastest growing telco stocks listed on the S&P/ASX 200. Over a long period of time, company management has demonstrated a consistent track record of delivering market-beating returns, much to the enjoyment of M2 Group shareholders.
M2 Group's growth strategy has typically involved acquisitions, with the company buying the iPrimus and Dodo internet services brands in recent years, to name just two. It has also sought to expand its consumer offering by pushing into complementary utilities, such as electricity and gas.
In April, M2 Group grabbed headlines when it announced that it was expanding its New Zealand business by acquiring CallPlus, New Zealand's third biggest internet service provider (and related company 2Talk Limited) for a total of $245 million. Two weeks later, M2 Group made headlines again when it entered the battle for iiNet Limited (ASX: IIN), in response to an earlier bid made by TPG Telecom Ltd (ASX: TPM). Whilst it was the TPG bid that was ultimately recommended by iiNet's board of directors, the move by M2 Group demonstrated management's ongoing focus on aggressively growing the business via acquisition, provided that the numbers stack up.
M2 Group's acquisitive growth strategy has produced fantastic returns for its shareholders. When comparing the before-dividend returns of M2 Group to the S&P/ASX 200 and its telecommunications peers — Telstra Corporation Ltd (ASX: TLS), TPG Telecom and iiNet — M2 Group has consistently outperformed over 1-year, 5-year and 10-year timeframes.
M2 Group has been able to successfully achieve forecast synergies from its earlier acquisitions. In the company's most recent results, announced to the market in February, management reported:
- Revenue increased to $546.2 million (up 8%)
- Net profit after tax (NPAT) increased to $38.5 million (up 25%)
- Earnings per share (EPS) grew to 21.2 cents (up 23%)
- Subscriber numbers increased to 1.634 million (up 9%)
In more good news for shareholders, the company's fully franked interim dividend was increased to 15 cents (up 30%). It is important to note that just four years ago the annual dividend was 16 cents. With analysts expecting the full year dividend for FY15 to be 30 cents, patient investors have been rewarded not only with market beating capital growth, but also an increase in the annual dividend of 87.5% since 2011. In its half-year results M2 Group management reaffirmed full year guidance for revenue growth of 8-9% and NPAT growth of 15-20%.
The acquisition of CallPlus and 2Talk was completed last week, just in time for the end of the financial year. In an announcement to the market M2 Group advised that the acquisition was expected to contribute in excess of NZ$250 million in revenue and NZ$45 million in earnings before interest, taxes, depreciation and amortisation (EBITDA) for FY16. This will boost underlying EPS by a further 15%.
Foolish takeaway
M2 Group's management has successfully delivered investor returns that have significantly outperformed its peers and the broader market over various time frames. The company's solid track record of generating significant revenue growth and its history of returning capital to shareholders via growing dividends make it an ideal stock for consideration in your portfolio. Whilst the biggest gains may already have been banked, it is my view that M2 Group still has plenty of room to grow.
