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2 bargain small-cap dividend stocks I’d buy for a passive income

Paul Summers — Sat, 23 Oct 2021 07:19:07 +0000

As a committed Fool, I reckon passive income is best achieved via the stock market. The task dividend hunters face, of course, is identifying which stocks to buy.

For my part, I feel that smaller companies are often unfairly ignored in favour of established FTSE 100 plodders. Accordingly, here are two examples of the former I might consider.

Passive income provider

Miner Central Asia Metals (LSE: CAML) is first up. The diversified base metals producer operates a copper facility in central Kazakhstan. It also owns the Sasa zinc and lead mine in North Macedonia.

For those who believe that demand for metals (and particularly copper) is only going to rise in the years ahead, CAML’s outlook could be very positive indeed. This could/should lead to improving free cash flow and, as a consequence, steadily rising dividends for passive income seekers.

Central is currently predicted to return 14p per share this year. That’s a chunky yield of 5.7%. For perspective, the best Cash ISA pays out a ludicrously low 0.65%. What’s more, this handout looks likely to be covered over twice by profit, making it, in theory at least, very secure.

The investment case is further boosted when considering the valuation. A P/E of just under 8 looks seriously cheap, given CAML’s relatively low net debt and consistent operating margins of over 40%.

Cheap market leader

Another small-cap option that’s grabbing my attention is collagen product manufacturer Devro (LSE: DVO).

Put simply, the £350m-cap provides the casing used in the production of sausages. That clearly doesn’t grab the attention in the same way as a glitzy tech stock. Then again, I’d probably prefer to own a global leader in a niche market rather than an unprofitable business in a highly competitive space.

Despite rising 33% in value over the last year, DVO shares trade on a little less than 13 times earnings. That looks good value to me. Returns on capital and operating margins have been improving in recent years. Debt has also been coming down.

As far as passive income is concerned, analysts have the company returning 9.27p per share for the current financial year. That’s a tasty yield of 4.4% at DVO’s current share price. Importantly, this payout is expected to be covered 1.8 times by profit. Like at CAML, that suggests dividends will actually be paid. To me, that’s far more preferable to firms promising too much and not delivering.

Never risk-free

Sure, no dividend stream is guaranteed. In fact, it can be one of the first things to be sacrificed when the going gets tough. It’s also worth highlighting other, more specific, drawbacks to investing here.

As far as CAML is concerned, the company clearly has no control over a volatile copper price. Moreover, mining is a notoriously tough sector, both in a physical and financial sense. The possibility of operations being interrupted by rising Covid-19 cases can’t be dismissed either.

Pandemic aside, DVO arguably doesn’t share these risks. However, it’s worth noting that the company hasn’t hiked its dividend by much over the years. Ideally, I’d want a payout to be increasing in order to outpace inflation. It’s not a killer blow, but it’s something to consider.

So, while I do rate both stocks as being cheap sources of passive income, the importance of staying suitably diversified shouldn’t be overlooked.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

3 top British dividend stocks with yields over 5%

Paul Summers — Tue, 15 Jun 2021 06:41:13 +0000

A ‘too good to be true’ income stream often turns out to be just that. As a result, I think it pays to be cautious when hunting for high-yield British dividend stocks. Nevertheless, there are companies out there offering big payouts that should be sustainable, at least in my view.

IG Group

Online trading platform IG Group (LSE: IGG) has been a huge beneficiary of the recent volatility seen in global stock markets. Since hitting a low of 563p back in March 2020, its share price has climbed 54% as traders have sought to capitalise on the big swing in sentiment.

After such a strong run, it’s rational to question whether this momentum will last for much longer. Even so, I believe the dividends on offer make IGG worthy of attention.

The FTSE 250-listed company is likely to confirm a full-year dividend of 43.2p per share when it reports full-year results next month. At today’s share price, that gives a yield of 5% exactly. While investing in IG naturally involves more risk, that’s a world away from the paltry interest rate offered by even the best instant access Cash ISA.

On top of this, strong free cash flow also gives me hope that, after a few years of being cautiously maintained, investors could see payouts increase from here.

Central Asia Metals

Another company offering a 5% yield is copper miner Central Asia Metals (LSE: CAML). Like IG Group, the mid-cap has done well for investors over the last year. In fact, anyone who picked up the stock in June 2020 would now be sitting on a gain of around 80%!

Of course, investing in the commodity markets isn’t for ‘widows or orphans’. The rise and fall of the gold price last year is one example of this. With this in mind, I wouldn’t hesitate to spread my money around other British dividend stocks in a variety of sectors. Having a suitably diversified income portfolio would allow me to sleep at night.

On a positive note, I see CAML’s payouts are likely to be covered more than twice by profits. This makes it very unlikely (but, naturally, not impossible) that those invested won’t receive their prized dividends. Couple this with the expected huge demand for the red metal over the next decade and I suspect CAML will be worth tucking away for a while.

Target Healthcare

A final British dividend stock offering a chunky income stream is Target Healthcare (LSE: THRL). This real estate investment trust (REIT) owns a growing portfolio of care UK homes.

Right now, the consensus among analysts is that the company will return 6.71p per share for FY21. That becomes a yield of 5.8% at the current share price.

As tempting as that dividend stream is, it’s important to remember that even the most predictable businesses can encounter crises. I probably don’t need to remind you of the awful impact of the coronavirus pandemic on Target’s industry last year.

Nevertheless, I think the investment case remains solid. Back in 2018, it was estimated that the number of people over 85 in the UK requiring care would double within 20 years. This should lead to higher demand for homes like those owned by Target. Such a development might prove even more lucrative if it’s able to capture a greater share of this fragmented market in the meantime.

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Paul Summers owns shares of IG Group Holdings. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

3 small-cap dividend stocks I think you may be overlooking

Paul Summers — Tue, 27 Aug 2019 06:38:56 +0000

It’s easy to get into the habit of thinking that only large companies are worth buying for the bi-annual or quarterly cash returns they dish out to their owners.

Personally, I’m also partial to looking further down the market spectrum for my dividend fix, particularly as these companies also have at least the potential to grow revenue and profit at a far more rapid rate than your average FTSE 100 beast.

With this in mind, here are three examples of market minnows that rarely grab the headlines but offer decent payouts to investors.

Cheap income

Clearly, anyone considering buying a slice of a business involved in the volatile mining industry must go in with their eyes wide open, especially given current concerns over slowing global growth. Nevertheless, my first pick is Central Asia Metals (LSE: CAML).

One big attraction of this copper, zinc and lead-focused firm is that it’s a great source of dividends (in sharp contrast to many of its smaller peers). A mooted 14p per share total return in 2019 equates to a stonking 7.5% yield based on last Friday’s closing price. Normally, I’d be wary of such a sizeable cash return but cover of 1.8 times by profit suggests holders should be able to sleep at night.

The shares are down 30% since April, not helped by the ongoing trade friction between Donald Trump and China. Should a resolution be found in the near future, we could see a bounce. In the meantime, prospective investors will only be paying a little under 8 times earnings to acquire the stock.

Another company that pays great dividends is logistics firm Wincanton (LSE: WIN). After a tricky few years of trading, the Chippenham-based business appears to be in a far better place with May’s full-year results including a 28.2% rise in pre-tax profit and a 34.6% reduction in net debt. More recently, the company announced that it had won a five-year contract with Morrisons to provide transportation services from three distribution centres to the latter’s stores.

It might not shoot the lights out in terms of capital growth, but a mooted 11.7p per share cash return this year leaves Wincanton yielding 5.1%. Again, the fact that this is likely to be covered almost three times by earnings means anyone holding probably won’t need to question the sustainability of these payouts for a while.

Despite operating in a low-margin industry, one might also argue that Wincanton’s stock is simply too cheap. A forward price-to-earnings (P/E) ratio of a little less than 7 gives a decent margin of safety in my book.

A final stock that I think warrants further attention from income investors is publisher Bloomsbury (LSE: BMY), best known for introducing Harry Potter to the world.

Following a decent couple of years in which its share price has climbed 37%, Bloomsbury isn’t quite the bargain it once was and now changes hands at 14 times forecast FY2020 earnings. That’s not ludicrously expensive, but it is fairly high relative to others in the industry.

The dividends still look attractive though. An 8.4p per share return in the current financial would mean a yield of 3.6% covered twice by profits. Bloomsbury also has no debt (appealing in the unpredictable world that is publishing) and, with the next illustrated version of JK Rowling’s still-outrageously-lucrative series due in October, should enjoy a good end to 2019.

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Why I think these small-cap dividend stocks could set you on your way to making a million

Paul Summers — Wed, 10 Apr 2019 13:38:15 +0000

Building a million-pound portfolio may sound fanciful but it’s actually very achievable for many private investors. Simply re-invest any dividends back into the market and allow the magic of compounding to work over two or three decades.

It’s the mirror opposite of a get-rich-quick strategy and that’s partly why it works so well for those patient enough to adopt it.

But don’t make the mistake of thinking that you need to stick to buying only the biggest UK-listed companies to reach seven figures. Here are two income-generating minnows that I remain very positive on.

Cheap income

Copper, zinc and lead miner Central Asia Metals (LSE: CAML) is an example of a smaller stock that offers great dividends. Indeed, it’s telling that the total cash return for 2018 was the first thing commented on by the company in today’s full-year results.

A final dividend of 14.5p per share was declared, equating to a trailing yield of 5.6% at the time of writing. That may be less than the 16.5p returned in 2017 but it’s still 44% of the adjusted free cash flow generated by the company in 2018 and in line with its policy of returning between 30%-50%.

Payouts are currently well covered by profits — more than can be said for some of the biggest London-listed companies — and, based on the company’s outlook, I can’t see this situation changing anytime soon.

Revenue from Central Asia Metal’s two low-cost mines almost doubled in 2018 to $204.2m.

Earnings before interest, tax, depreciation and amortisation (EBITDA) came in at $125.3m — 132% higher thanks to acquisition and contribution of its Sasa mine. That’s a particularly good result considering the average 20% fall in the basket price of the company’s base metals over the period.

Looking ahead, the £469m-cap chose to stick to its previous guidance on production for 2019 but also highlighted that capital expenditure at Sasa would be around $10m lower.

Since I’m generally averse to companies owing a lot of money, I also really liked the near-21% reduction in net debt (to $110.3m) from the previous year.

Despite appreciating in price recently, shares in Central Asia Metals trade on a trailing price-to-earnings (P/E) of a little under 11, according to my calculations. That suggests pretty good value to me.

Dependable dividends

Another small-cap that I’ve liked for some time is kettle safety control manufacturer Strix (LSE: KETL).

Last month’s final results highlighted a “solid performance during 2018“, with revenue increasing by 2.7% to £93.8m and pre-tax profit 3.2% higher at £29m.

Particularly noteworthy was the continued growth in demand for the company’s Aqua Optima filtration products in the UK.

In addition to this, the business still managed to maintain its 38% share of the kettle control market, supported by eight successful defences of its intellectual property.

Like Central Asia Metals, Strix is also working hard to improve its balance sheet. Net debt was reduced to £27.5m by the end of last year — just over 40% less than in December 2017.

And the dividends?

Strix confirmed a total payout of 7p per share, which gives a really-very-reasonable trailing yield of 4.4%.

Having bounced back a little over 20% from its mid-December low, I wouldn’t be surprised if the share price lost a bit of steam for a while.

At 11 times forecast earnings, however, I also suspect those buying an initial stake today will still be richly rewarded in time.

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Paul Summers owns no shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

These bargain copper stocks could help you achieve financial independence

Paul Summers — Thu, 16 Aug 2018 14:59:12 +0000

The ongoing trade tensions between the US and China have had a severe impact on commodity prices in recent weeks, most notably copper. While some may regard flagging demand for the latter as a sign of impending doom on the markets, I see recent volatility as a great opportunity for investors with time on their sides.

Why am I bullish? Simply because analysts are forecasting a supply deficit in the red metal over the next few years. This, combined with an increase in demand for new technologies including electric vehicles, could put a rocket under the stock prices of well-managed, quality copper miners in time.

It’s for this reason that I was drawn to today’s numbers from Kaz Minerals (LSE: KAZ).

Big acquisition

The share price of the FTSE 250 mining giant has been in freefall recently, partly due to investor jitters over its decision to buy the undeveloped but significant Baimskaya copper project in Russia for a little under £690m. While management regards the deal — completing in H1 2019 — as a demonstration of Kaz’s ambition, there is concern that operating in a different political environment to Kazakhstan will prove problematic for the company.

Thanks to a solid set of interim numbers, it would appear that at least some of this nervousness has been forgotten today.

Group revenues rose 31% to £1.1bn in the six months to the end of June with gross earnings before interest tax, depreciation and amortisation (EBITDA) climbing 37% to $690m. Pre-tax profit soared almost 48% to $355m at the same time as net debt fell to $2.05bn from $2.44bn. All looks rather good to me.

Positively, Kaz also maintained its guidance on production and costs for the full year (with the former at 270-300 kt), adding that planned expansion of its Aktogay mine was “progressing well“.

Given that the stock was trading on a bargain 5 times forecast earnings before today, it’s no wonder that some investors have taken advantage. The question is, do you have the risk tolerance to sit with the shares until they fully recover? At this price, I’m sorely tempted.

Monster dividends

Of course, Kaz isn’t the only option out there. Mid-cap Central Asia Metals (LSE: CAML) is a stock that’s been on my watchlist for some time.

Fortunately, I haven’t pulled the trigger yet. Had I done so in March, before all this trade rhetoric began, I’d be sitting on a loss of almost 40%.

So, what can Central Asia Metals offer that Kaz doesn’t? That’s easy — a decent dividend.

Actually, that’s something of an understatement. The stock is forecast to yield a stunning 7.5% in 2018, with the payout covered over twice by expected profits. That looks very reasonable compensation in return for a bit of patience. Contrast this return with today’s announcement from Kaz of its first dividend since 2012 (6 US cents per share) following the “successful delivery ” of its Bozshakol and Aktogat projects. An encouraging development, no doubt, but not in the same league as that offered by its peer. A cynic might even view it as a way of appeasing shareholders over Baimskaya as much as being an indication of management’s confidence in the company’s future.

Like Kaz, Central Asia Metals trades on a low valuation — just 6 times forecast earnings. While no one knows where the copper price will bottom, surely we must be entering oversold territory?

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Is this mid-cap high flyer even better than Rio Tinto plc?

Kevin Godbold — Thu, 12 Apr 2018 11:00:55 +0000

Mining and exploration company Central Asia Metals (LSE: CAML) delivered pleasing full-year results today with revenue up almost 54% compared to a year ago and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) shooting 66% higher. The directors pushed up the total dividend for the year by 6%.

Big acquisition

The big news during 2017 was the gargantuan $402m November acquisition of Lynx Resources, which brought the Sasa zinc-lead mine in Macedonia into Central Asia Metals’ portfolio of producing assets. Prior to this, the company’s principal business activity was the production of copper cathode from its Kounrad operations in Kazakhstan. The combination of CAML and Lynx provides commodity, geographic and operational diversification, and CAML’s chairman, Nick Clarke, said: “We can already see the benefits of our acquisition,” and he pointed to the firm’s strong showing on EBITDA and EBITDA margin. Profits and margins were also driven up by a “much improved”copper market where the London Metal Exchange (LME) price increased by 30% during the year.

Mr Clarke thinks the diversified and enlarged business will enable the firm to “remain well positioned throughout the commodity cycle,” but sounded what I perceive as a warning, saying that the sector “is now starting to experience cost inflation.” I can remember the last time the mining industry lost control of its costs back in 2006/07. The situation presaged the bursting of the ‘commodity-super-cycle’ bubble, so I’m nervous about holding mining stocks today.

The ups and downs of cyclicality

However, the near-term outlook remains positive because many in the industry expect a challenging 2018 for copper supply “that could result in another positive 12 months for the copper price.” Mr Clarke also explained that in the market for zinc, “supply-side challenges remain,” which could push the price up because of rising demand expected to increase to over 15m tonnes by 2019.

Right now, Central Asia Metals is flying high, and if you are looking for an investment in a miner, it could be an even better bet than one of the gigantic mining operations such as Rio Tinto(LSE: RIO), which has enjoyed a couple of years of earnings growth. In fact, right now, the firm is throwing off cash, paying a big dividend and everything in the garden looks rosy.

But you don’t have to look back very far to see that things are not always rosy for the miners — sometimes, the landscape looks positively weed-clogged. As recently as 2014 and 2015 the firm posted big declines in annual earnings and the share price dipped around 55% below today’s level of 3,690p or so in early 2016, and the dividend was reduced. Mining companies are among the most cyclical you can buy shares in, and trading outcomes are always at the mercy of prevailing market commodity prices. That’s worth remembering if you are attracted to a firm like Rio Tinto for its fat dividend. To me, big cyclical firms such as Rio Tinto are for shorter-term trades aimed at catching the up-leg in a cyclical share-price move, but I’ll look elsewhere for my long-term dividend investments.

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The only FTSE 100 stock I own right now

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 bargain dividend stocks I’d buy before the ISA deadline

Paul Summers — Sat, 10 Mar 2018 12:00:42 +0000

With the end of the current tax year now firmly in sight, it’s more important than ever to take advantage of your £20,000 ISA allowance. Having done so, the only question that remains is what to buy with your capital.

Here are a couple of (what appear to be) bargain stocks offering enticing dividend yields for those comfortable investing lower down the market.

Dividend delight

It may be a minnow in comparison to FTSE 100 giants such as Rio Tinto, Glencore and BHP Billiton but £580m cap miner Central Asia Metals (LSE: CAML) looks a tempting option for those wanting to take advantage of the current bullish sentiment surrounding commodity markets. The base metals producer owns the Kounrad solvent extraction and electrowinning copper facility in Kazakhstan as well as 80% of the Shuak copper exploration project in the north of the country.

It doesn’t stop there. In November last year, the firm purchased Lynx Resources for just over £400m and, in doing so, acquired the Sasa zinc and lead mine in Macedonia. Once integrated, the low-cost project is expected to generate cash for Central Asia Metals in its first year. More recently, the company signalled that it was looking to acquire another low-cost copper project — this time in Africa — in an effort to further diversify its operations.

Aside from these encouraging developments, a big attraction to the stock is the dividends on offer, made possible by the general rise in commodity prices over the last 12 months. Based on its current share price (which has already climbed almost 50% over that period), owners can expect to receive a 5.3% yield in 2018, easily covered by profits which are forecast to soar in the next financial year and leave the company valued at just 8 times earnings.

Full-year numbers from Central Asia Metals are expected on 2 April. With investors continuing to salivate over the electric vehicle revolution, the positive impact this could have on the mining industry and the possibility of the copper market finally slipping into deficit, I think now is as good a time as any to begin building a position.

Strong trading

For something completely different, consider the UK’s second largest home-collected credit lender Morses Club (LSE: MCL).

A beneficiary of Provident Financial’s troubles, recent trading at the £177m cap has been described as “strong” by management, even if this is yet to be fully reflected in its share price.

The total amount of credit issued by Morses in the year to 24 February was £174.3m — a 21% rise on the previous year. In addition to growing its gross loan book by 12%, the company also saw impairments “at the upper end” of previous guidance — something it attributes to the “quality” of its 229,000 customers.

Elsewhere, there’s been decent interest in its Club Card offering with 21,000 customers now signed up and £10.6m of loan balances on the cards. The launch of its online instalment loans product — Dot Dot Loans — is another intriguing move and likely to be a catalyst for further growth over the medium term.

While the somewhat risky nature of its business means that the value of shares in Morses Club are unlikely to lose touch with reality, a forward price-to-earnings (P/E) of 10 for the next financial year still looks great value, particularly when you consider that the shares look set to yield around 5.7%.

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Why I’d consider buying Zanaga Iron Ore Co Ltd after three-bagging in a month

Alan Oscroft — Sun, 26 Nov 2017 10:13:37 +0000

If you’re investing in natural resources, like oil, gas and minerals, Zanaga Iron Ore (LSE: ZIOC) could look like a dream stock.

If you’d bought a month ago, you’d already be sitting on a nice three-bagger with the price at 17.5p — and it’s been higher, peaking at over 25p on 15 November.

The game was afoot in September, when interim results from the iron ore prospector tantalisingly spoke of “assessing the opportunity for a small-scale early production start-up project.“

That was followed by news of an environmental permit on 8 November, awarded “pursuant to its Mining Licence granted in August 2014,” though the company made it clear that development is dependent on financing — and that it is still only at the study phase, with the outcome not expected to be known much before the end of the year.

A similar story?

Zanaga reminds me in some ways of Sirius Minerals, whose shares have climbed as progress with its North York Moors potash project has progressed, and I think there are lessons to be learned from the comparison.

Firstly, Sirius shares have spiked and fallen several times — up when news is released, and down again when nothing much is happening. Zanaga shares could very well do the same.

And like Sirius, Zanaga shareholders don’t yet have any real visibility of the full financing required for the project or of the degree of dilution they could face — and those are the kinds of unknowns that markets really don’t like.

I see volatile times ahead for Zanaga, and fully expect more price spikes and falls. It’s not for those who can’t face a bit of risk, but I could be tempted.

Cheap dividends

If you want a potentially safer miner which is already making healthy profits and paying attractive dividend yields, Central Asia Metals (LSE: CAML) is worth a look.

The company has, for years, been solely a copper producer with a very profitable project in Kazakhstan, which has enjoyed some of the lowest production costs in the business.

Earnings have been a little erratic in recent years, but dividends have been strong, progressive, and well covered — forecasts suggest yields of 5.3% this year followed by 5.9% next, and with strong EPS growth predicted, those would be covered 1.5 times and 1.9 times respectively.

The share price has climbed 30% in the past year to this week’s 265p levels, yet we’re still looking at forward P/E multiples of only 11.5 and 8.7 (with PEGs of 0.9 and 0.2, which look like strong growth indicators).

Expansion

The recent resurgence in confidence has coincided with Central Asia’s expansion, through a merger with Lynx Resources which owns the Sasa zinc-lead mine in Macedonia. The merger took the technical form of a reverse takeover, after which the shares in the combined company were readmitted to AIM under the original ticker.

That adds a nice bit of diversity, both in terms of resources and geography — investors might be a bit nervous buying into a company potentially at the mercy of the Kazakhstan government, and the expansion into Macedonia should bring some relief.

Executive chairman Nick Clarke spoke of the low production costs at Sasa complementing the firm’s copper operations, suggesting that having “two long life and cash generative base metal operations in highly prospective jurisdictions” should enable the firm to continue providing attractive returns.

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Alan Oscroft owns shares in Sirius Minerals. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 mining stocks to help you retire early

Roland Head — Tue, 04 Apr 2017 10:11:47 +0000

The last couple of years have been a wild ride for mining investors. But I believe we’re now in a position to buy good mining stocks at attractive prices, without excessive risk.

Today I’m going to look at two stocks I believe could help you to build a market-beating retirement portfolio. There’s a mix of growth and income on offer, plus the potential for further steps up in profit.

Just too profitable?

Central Asia Metals Ltd (LSE: CAML) operates a copper project in Kazakhstan. The company has an unusual problem. It’s too profitable. Almost any new project would dilute the rates of return the company generates from its ultra-low cost Kounrad project.

In 2016, the firm’s copper production rose by 16% to 14,020 tonnes. Revenue of $66.7m generated an operating profit of $33.0m, giving a stunning operating margin of 48.7%.

Shareholders will reap the benefit of this strong performance. As much as 31% of last year’s revenue will be returned to shareholders by way of a total dividend of 15.5p. This gives a yield of 6.7% at the current share price of 229p.

This isn’t a one-off performance. The company’s dividend policy is to return at least 20% of revenue from Kounrad to shareholders each year. Central Asia Metals floated in London in 2010. By September 2015, the group had already returned the entire amount it raised in the IPO to shareholders through dividends and share buybacks.

Although Kounrad won’t last forever, in 2016 the company completed the majority of an expansion project that should allow the mine to remain in operation beyond 2030.

Central Asia’s shares trade on a 2017 forecast P/E of 10.2 with a prospective yield of 6.2%. In my view any downside risks from copper prices or exchange rates are limited, given the firm’s profitability and cash generation. I believe the stock remains an attractive buy.

A more diverse choice

If you’re concerned that Central Asia Metals relies too heavily on just one asset, then you might want to consider the more diverse charms of BHP Billiton (LSE: BLT). This FTSE100-listed mining giant offers exposure to copper, coal, iron ore and oil, among others.

The group profited from the rapid rebound in iron ore and coal prices last year and is also benefiting from a stronger copper market. These commodities continue to look attractive in 2017.

But in my view, the joker in the pack is that the oil market recovery remains at a fairly early stage. If oil continues to climb and reaches $60 per barrel over the next 12-18 months — as I expect — then BHP’s petroleum-related profits could rise significantly.

In the meantime, the financial fundamentals look strong. Net debt fell from $26bn to $20bn last year and further debt reduction is planned. The group’s free cash flow has recovered and comfortably covers the dividend.

BHP shares have pulled back by about 15% from the highs seen at the start of this year. This has left the stock trading on a 2017 forecast P/E of 10 with a prospective yield of 5.7%.

I believe this could be a good entry point for a long-term buy.

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Roland Head owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why shares in Cape plc soared 17% today

Roland Head — Thu, 05 Jan 2017 12:18:13 +0000

Shares of industrial services group Cape (LSE: CIU) rose by 17% this morning. In this article, I’ll explain what lies behind today’s news, and ask whether Cape deserves a buy rating.

I’ll also consider the attractions of another a mining stock — one which has stacks of cash, and offers a 6% forecast dividend yield.

A sudden turnaround?

Cape issued a trading update this morning advising investors that 2016 full-year results are expected to be “materially ahead of current expectations”. In my view, that’s likely to mean that adjusted earnings per share will be 10%-20% higher than current consensus forecasts.

If I’m right, then we could be looking at earnings of 28p-30p per share for 2016. Even after today’s gains, Cape shares would still be trading on a forecast P/E of about six, with a prospective yield of 7.8%.

This cheap valuation could be a buying opportunity. But it’s also a warning that the dividend may be unsustainable.

Cape is involved in a significant amount of litigation relating to industrial disease claims and, more recently, to product liability claims. Although this all relates to historic elements of the group’s business, the costs must be met by today’s shareholders.

Cape shares fell by about 25% in November after management warned investors that the dividend might have to be cut if the firm loses a complex trial that’s due to start this month.

A second concern, in my view, is that Cape already has quite high levels of debt. The group’s June 2016 net debt of £113.7m is double the level reported in 2010, even though its profits are now much lower.

Today’s news suggests that trading conditions are improving for Cape, but doesn’t really change the financial risks facing the firm. There’s no way to know how the various legal actions will turn out, which makes the shares too speculative for me.

A 6% yield from copper?

One of today’s other movers is fast-growing Kazakhstan copper producer Central Asia Metals Ltd (LSE: CAML). According to an operations update this morning, the group’s copper production rose by 16% to a record high of 14,020 tonnes in 2016.

CAML has very low costs, and the development of its Kounrad project was fully funded by shareholders. This means that when Kounrad went into production, CAML had no debt and plenty of cash.

The firm’s shareholders are now benefitting from this far-sighted approach. The value of their stock has doubled over the last four years, while dividend payments have risen by about 55%.

CAML reported an impressive operating margin of 50% during the first half of last year. The price of copper has risen since then, and I expect cash generation and margins to improve in 2017.

The shares currently trade on a forecast P/E of 13 and offer a prospective dividend yield of 5.8%. Earnings per share are expected to rise by 13% in 2017. For investors who are happy with the risks of investing in emerging market mining stocks, I believe CAML remains a tempting buy.

The post Why shares in Cape plc soared 17% today appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.