Dividend income from smaller companies

Monday, 22nd August 2016 09:24 - by David Harbage

Further to last week’s article which commented on the difficulty of finding reasonable level of income from cash deposits or government bonds, UK inflation data has been published which indicates a rise in underlying prices that further threatens real (purchasing power considered) income.

In July 2016 the Consumer Prices Index (CPI) accelerated to 0.6%, from 0.5% in June, driven by rising prices for motor fuels, alcoholic beverages and accommodation services alongside a smaller fall in food prices than a year ago. Essentially, the vast majority of savers are receiving negative returns on their cash deposits. The prospect of taking some risk with one’s capital (lump sum) by considering taking a stake in stock exchange listed businesses – subject to taking the appropriate longer term view, and being comfortable with the inevitable shorter term price fluctuations – has greater appeal, in order to achieve a reasonable level of income.

The writer would not wish to encourage any individual to own company shares without having received financial advice confirming that it is appropriate to their personal financial goals and particular circumstances. It might come as a surprise to many, but the objective of a large proportion of institutional fund management is focused on procuring a certain level of income and growth in that income – as opposed to appreciation in capital. Logically, if the former is achieved, the latter follows.

Last week’s article featured six very large multinational companies together with another six which were a little smaller, but still industry leaders and often constituents of the FTSE100 index. In response to readers’ requests, this blog highlights smaller (or medium sized, depending on perspective) company stocks whose income yield is above the stock market’s average, is well covered by profits and offers the prospect of growth in the dividend pay-out over the next two years:

1. Cape Group – the shares of this £227m market capitalised provider of various critical support services to companies in the energy and natural resources sectors, worldwide, currently yield 7.5%. While profits this year are expected to be restrained by the low oil price, the dividend is covered 1.75 times by earnings and a consensus of 4 brokers anticipate an unchanged dividend pay-out in 2016 and 2017 ahead of a pickup in 2018.
2. Crest Nicholson - the shares of this £1,116m builder of residential homes in the south of England and the Midlands currently yield 4.5%. However, with double digit profit growth this year and further progress in the year to 31 October 2017, dividend cover of 2.5 times is set to be relaxed to 1.9x as a boost in dividend pay-out is set to deliver an income yield of 7.4% based on a consensus of 11 brokers.
3. Interserve - the shares of £562m international support services to the construction industry (advice, design, equipment services, facilities management in public and private sector), currently yield 6.3%. While profits this year are expected to be flat, earnings are expected to bounce back in 2017 according to a consensus of 8 brokers. The dividend, covered 2.8 times by last year’s profits, is forecast to rise in 2016 and 2017.
4. Liontrust Asset Management - the shares of this £148m London-based independent, non-bank owned, specialist fund manager which began life in 1995 currently yield 3.7%. While this is no more than the average for the UK equity market, double digit profit growth in the two years to 31 March 2018 should boost the dividend and extend cover to 2 times, with the anticipated pay-out worth 4.9%.
5. TT Electronics - the shares of this £245m global provider of engineered electronics for performance critical applications in a wide range of industries currently yield 3.7%. Double digit profit growth in calendar 2016 & 2017 should extend the dividend cover to 2 times and the anticipated pay-out to a yield of 4.2%.
6. Marston’s - the shares of £881m independent brewer (Banks, Brakspear, Jennings, Mansfield, Revisionist, Ringwood, Wainwright, Wychwood) and operator of circa 1,700 pubs currently yield 4.8%. A consensus of 13 brokers anticipate profit growth of 5-6% in the next two years to 30 September 2017 and dividend cover of 1.85 times earnings allows dividend growth at a similar rate to produce an income yield of 5.3%.
7. Tullett  Prebon - the shares of this £880m interdealer broker (acts as an intermediary in the wholesale financial and energy sectors, facilitating banks’ trading) currently yield 4.6%. While profits are likely to be flat and the dividend (covered 1.9 times) unchanged this year, a consensus of 8 brokers forecast 9% earnings growth next year and a resumption in dividend progression.

Beyond the above mentioned premium listed FTSE All Share index businesses, which entails reasonably high levels of disclosure and corporate governance, the following three high dividend paying companies are listed on the less highly regulated Alternative Investment Market (AIM) – and as such should be perceived as higher risk-reward:

1. Epwin Group - the shares of this £155m producer of low maintenance building materials and products (notably PVC-U windows and doors) currently yield 5.8%. The company’s house broker expects 25% growth in earnings this year and 5% next. Dividend cover is 1.8x and this is set to be maintained as the income yield for calendar 2017 rises to 6.4%.
2. Fairpoint Group - the shares of this fast growing £49m provider of legal services, debt management and claims solutions specialist currently yield 6.4%. Despite the prospect of a bumpy ride for earnings over the next two calendar years, as acquisitions are integrated, the dividend is 2.2 times covered and the 2 house brokers expect the pay-out to increase ahead of inflation, to offer a yield of 6.8%.
3. Plus500 - the shares of this £826m provider of online trading services to retail customers, via mobile devices, currently yield 5.4%. While independent research is hard to find, the house broker expects 15% growth in earnings this year and 6% next. Dividend cover is 1.67x and this is set to be maintained as the income yield for calendar 2017 rises to 6.4%. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.