On top of that, it’s difficult to time the purchase of a bombed-out share. You can use all the value indicators in the world and still find yourself buying when there’s a further 90% or so for the stock to fall! In cases like that, even if you get the turnaround you wanted, you can still end up losing money on the share because a 90% fall requires a 900% gain to break even, and that’s a tall order.

A low valuation

One superficially tempting-looking turnaround proposition exists in distributor Connect Group (LSE: CNCT), which sports a forward-looking price-to-earnings ratio for the trading year to August 2020 of just under 4.5. Cheap, cheap, cheap, but the problem for me is that the business isn’t a very good one in the first place, and I’d rather seek turnaround candidates from among enterprises operating in more attractive sectors.

Connect operates in newspaper and magazine wholesaling, and mixed freight distribution with brands Smiths News and Tuffnells. The sector is characterised by low margins, high competition and weak product or service differentiation. I’d describe the business as commodity-style, so it seems unlikely to me that the company will ever sport decent quality indicators. I reckon any turnaround in fortunes will be limited unless Connect changes direction.

Today’s half-year report for trading to the end of February makes grim reading. Compared to the equivalent period the year before, the adjusted figures show revenue down 4.4%, operating profit almost 28% lower, earnings per share sinking 36% and free cash flow collapsing by 42%. One bright spot in the figures is that net debt has fallen by 7.3% to £77.5m, but that remains a mighty pile of borrowings, which is almost as high as the figure for market capitalisation.

An optimistic chief

But chief executive Jos Opdeweegh seems optimistic in the report, saying that there was a “good performance” from Smiths News, an ongoing turnaround opportunity in the Tuffnells business and “further benefits from central efficiencies and focused capital management.” One thing I do like is that Opdeweegh only took up his position in September 2018, so will be looking at operations with a fresh eye, new determination and plenty of vigour. However, I reckon the poor economics of the business will prove to be a challenge and I’m not prepared to risk my capital by buying any Connect shares.

Investing in smaller companies listed on the stock market can be a decent strategy. But I’d target firms that are growing and trading well rather than companies that have become small-caps because of declining trading and falling share prices. As an alternative to picking individual small-caps, I’d also look at tracker funds that follow small-cap shares, or perhaps one that follows the FTSE All-Share Index.

The post Why talk of a turnaround at this firm leaves me cold, and what I’d buy instead appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any share 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.

Yet, Connect had raised its dividend by around 32% over the previous five years and had a record of rising cash flow that lent decent support to earnings. So what could possibly go wrong? Apart from its high debt, one problem I saw back then was the firm’s “high level of cyclicality“ in its operations, and I thought it deserved its low rating.

Things unravelled fast

I concluded by saying that I’d keep “a close eye” on the firm for signs of deterioration in trading if the shares were in my portfolio. Luckily for me, the shares were not in my portfolio, because things unravelled fast for the company. The share price is now around 80% lower than it was back then and at first glance, the immediate damage has been caused by a more than 40% plunge in earnings and a slashing of the dividend, which now stands around one-third of its previous level.

The company did dispose of its Education and Care Division during the summer of 2017, which accounted for around 12% of annual operating profit. The transaction raised around £56m, which the firm used to pay off some of its debt. However since then, trading became very difficult for the remaining operations and profits fell off a cliff. I think it was probably right to be wary of the cyclicality in the enterprise all along. The firm’s activities as a distributor in News and Media, Parcel Freight and Books all strike me as lacking any pricing power, or economic niche, to distinguish them from competitors.

Let’s pick up the story with today’s full-year results statement. Compared to the previous year, adjusted revenue slipped 3.8%, and adjusted earnings per share plunged by 40%. That’s grim, considering adjusted figures are aimed at showing the true performance of the business. The directors slashed the dividend by just over 68%.

Now it’s a potential turnaround

Chairman Gary Kennedy was blunt in the report and said: “A year of significant challenge exposed weaknesses in our strategy and its execution, with a consequent impact on results.” But he’s optimistic that the new chief executive, Jos Opdeweegh, can turn things around. Opdeweegh started on 1 September, so it’s early days. And if you like the idea of a turnaround proposition, now is a good time to look at the firm, I reckon.

But I’m not interested. At best, Connect Group is a commodity-style operation and will probably always face challenging trading conditions. I’d rather target a company with better quality indicators and a stronger trading niche, or invest in a tracker fund such as one that follows the FTSE 100 index, which would shield me from individual company risk. When shares go wrong, the results can be catastrophic in your portfolio, so it pays to select your investments carefully, and abstain from investing if you have any doubts, such as those I had with Connect almost two years ago.

The post Why I’d avoid the turnaround proposition at Connect Group and what I’d buy instead appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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.

According to the update, since the beginning of May, when the firm reported a “challenging” start to its financial year, trading performance has continued to be “extremely disappointing,” and now management has “materially reduced its expectations for full-year profit before tax.“

There’s no one single factor behind Connect’s problems. The group’s three main businesses, Smiths News, Pass My Parcel and Tuffnells are all suffering from falling sales and rising costs. 

No light at the end of the tunnel 

Connect has been struggling to ignite growth for several years now and management (as well as the City and investors) had hoped that the group’s efforts to break into the last mile distribution business, via its Pass My Parcel business, would allow it to profit from the boom in online retailing.

Unfortunately, it now looks as if this dream is dead. Today, Connect has announced the closure of this business. Management is in discussion with clients to “effect as orderly withdrawal as possible.”

With Connect’s outlook only deteriorating, it’s no surprise CEO Mark Cashmore, and CFO David Bauernfeind have both decided to fall on their swords and leave the enterprise. To add insult to injury, it also looks as if the stock’s market-beating dividend yield is history. According to today’s update, the full-year 2018 dividend will now be “substantially reduced” from the rate paid in 2017. 

The last time I covered Connect, I concluded that investors should avoid the company due to its high level of debt, pension obligations and lack of cash flow to support the dividend. With the firm’s outlook only deteriorating, I continue to believe that this is the right course of action. 

A small-cap set to beat the market 

Connect may be circling the drain but one company I’m more positive on the outlook for is Renold (LSE: RNO)

Renold might not be the next Boohoo.com or Fevertree, but it looks to me as shares in this chain manufacturer are just too cheap to pass up. The stock is trading at only six times forward earnings. 

Granted, Renold isn’t without its own problems. The £71m market cap company has a net pension deficit of £82m. But this obligation declined around 5% over the past year, and should only fall further as interest rates rise. Management is also taking steps in “de-risking this position“. 

Route to growth 

Renold is currently in the midst of a transformation plan called STEP 2020, which is designed to lower costs, improve efficiency and improve sales. As well as streamlining manufacturing operations, the group is also investing in its sales force and hunting for select acquisitions. As STEP 2020 unfolds, City analysts expect earnings per share to leap 190% over the next two years. 

And it’s this growth that gets me excited. Even though Renold’s balance sheet might not be in the best shape, I believe the firm can grow out of its problems. For investors, the risks are also discounted due to the low valuation. At only six times forward earnings, the City seems to have written the business off. A slight improvement in expectations could lead to a big payoff for investors. 

The post This small-cap stock could smash the FTSE 100 this year appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo.com. 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.

Heading for trouble?

Shares of specialist logistics group Connect Group (LSE: CNCT) were down by 6% at 56p at the time of writing this morning, taking their total decline over the last year to 55%.

The company operates parcel group Tuffnells, while its Smiths News business has a 55% share of the UK newspaper distribution market. But Smiths is struggling with declining newspaper volumes, while Tuffnells generated a loss during the first half of the year.

This 16% yield should be cut

Connect’s revenue fell by 3.4% to £766.5m during the period, while operating profit dropped 37% to £12.4m. Earnings per share for the half year to 28 February fell by 42% to 3.1p.

This was just enough to cover the interim dividend, which was held unchanged at 3.1p. If this payout is maintained at the end of the year, then the stock would offer a forecast yield of 16% at current levels. But in my view this is very unlikely. I think the final dividend is almost certain to be cut, probably by at least 50%.

Why I’d sell

This could be a great turnaround buy. Even if the dividend is reduced by 75% it would still be attractive at 4%. And the current forecast P/E of less than 5 leaves plenty of room for a re-rating.

However, I’m leaning towards selling my shares. I’m concerned that net debt of £83m could become a problem if profits fall further. And I also think that this investment probably falls into the ‘too hard’ category. I just don’t have the insight needed to understand what the firm can realistically achieve with its assets. So I’d rate the shares as a sell.

Making good progress?

Another company whose outlook I find hard to understand is newspaper publisher Trinity Mirror (LSE: TNI).

This stock trades on an even more extreme valuation than Connect Group. Adjusted earnings are expected to remain stable this year, but Trinity Mirror has a forecast P/E of 2.3 and a prospective yield of 7.1%.

Interestingly, this dividend does appear to be well supported by earnings, with a dividend cover ratio of 5.9 times. However, there’s a reason for this, as I’ll explain.

So what’s the problem?

The recent acquisition of Express Newspapers boosted investors’ hopes that this business may be able to return to growth.

But from a financial point of view, the big risk for shareholders is the pension scheme. At the end of 2017, Trinity Mirror had pension liabilities of about £1.9bn, and a pension deficit of £377m.

To try and reduce this deficit, Trinity Mirror has agreed to pay £43.8m each year into the pension for 10 years from 2018. Based on the group’s 2017 pre-tax profit of £122m, that’s around one third of annual profits.

This is why the dividend is so low, compared to earnings. Most available cash is being paid into the pension.

Chief executive Simon Fox is managing a difficult balancing act in order to keep everyone happy. But with newspaper sales continuing to fall, I’ve no idea whether he’ll be able to keep it up. That’s why I’m staying away from this special situation.

The post Two 7%+ yields I wouldn’t touch with a bargepole appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head owns shares of Connect Group. 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.

As a value investor, I’m often tempted by turnaround stocks if I feel that the company’s cash flow and balance sheet are strong enough to allow a recovery.

A classic contrarian buy?

One of the more extreme situations in the market at the moment is logistics specialist Connect Group (LSE: CNCT). This Swindon-based firm’s main business is the delivery of newspapers to shops each morning. It also owns parcel firm Tuffnells.

Connect shares have slumped from 143p to 66p over the last year and recently crashed 28% in one day following a profit warning.

I held the shares before the profit warning and decided to average down afterwards. Although the expected shortfall in profits this year is disappointing, the fall in the share price has been much greater than the expected shortfall in profits.

This business is still profitable and highly cash generative. I believe this should give management the breathing space they need to develop new sources of growth.

Is a 14% yield possible?

Anything connected to the traditional newspaper business is extremely out of favour at the moment. Valuations are very depressed — Connect stock currently trades on a forecast P/E of 4.7, despite having cut its debt levels significantly last year.

This ultra-low valuation means that the group’s forecast dividend yield has risen to more than 14%. That’s clearly a signal that the market expects profits to fall, with the dividend likely to be cut or suspended.

I agree that further problems are quite likely. I wouldn’t take a large position in this stock. But if management can stabilise profits and find a route back to modest growth, then the shares could re-rate strongly, providing attractive gains from current levels.

Should you buy this retailer?

It’s no secret that high street retailers are finding things tough. A good example is men’s formalwear specialist Moss Bros Group (LSE: MOSB).

This company warned in January that full-year profits were likely to be “slightly below current market expectations”. The shares have since fallen by 22%, even though this is only expected to be a small miss.

What’s worrying the market, in my view, is that Moss Bros sales appear to have fallen off a cliff in December. The company said that like-for-like sales rose by 1.2% from August to November, but then fell by 8% in December.

That’s a remarkable decline. It suggests to me that there’s some underlying problem. No information was provided on what this might be, but management did say it also expects 2018/19 profits to be lower than anticipated.

I’m staying away

Moss Bros’s saving grace is that it has a strong balance sheet. Net cash was £21m at the end of July, which is equivalent to around 30% of the group’s £70m market cap. We don’t know how this may have changed during the second half, but this cash should mean that management can afford to invest in the business without financial constraints.

However, men’s fashion is always a difficult area. Until the company provides more information about the problems it’s facing and how they will be addressed, I plan to stay away from this stock.

The post Why this 14% yielder is still on my buy list today appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head owns shares of Connect Group. 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.

Since mid-January 2017, the shares have fallen around 50% and it seems not even the company’s market-beating 9.5% dividend yield can entice investors back. 

Struggling to turnaround 

Management has been working to turn Connect around for several years. As part of this drive, the firm has invested heavily in moving away from its traditional business of supplying newsagents and into logistics and parcel delivery. City analysts were expecting this investment to begin to show through in the company’s results for fiscal 2018, with earnings growth of 31% expected.  

However today, Connect has warned that pre-tax profit for the full-year is now expected to be in the range of £42m-£45m, against City expectations of £49m. Management is blaming this poor performance on “combination of delays to contracts in Pass My Parcel, weaker margins, market uncertainty in Mixed Freight, and slower than anticipated realisation of cost reductions from the group’s integration strategy.“

In a double blow to shareholders, it was also announced today that the sale of Connect’s books division, which was expected to raise £11.6m, is no longer going ahead. Despite agreeing on the deal, private equity firm Aurelius has now decided to pull out, even though it’s legally required to complete the transaction. Management is pursuing legal options to assess its next steps. 

Weak balance sheet 

Connect’s biggest problem is its balance sheet. It seems that like failed outsourcer Carillion, Connect has been paying out more than it can afford to shareholders as profit margins contract. Even though net debt fell by 42% to £82.1m for the full-year to 31 August 2017, substantially all of the firm’s free cash flow went on paying its dividend and pension fund contributions. Debt was reduced through asset sales. If we take away the £100m of intangible assets from the balance sheet, shareholder equity is actually negative £75m. 

Even though I have recommended Connect’s dividend in the past, this was based on the company hitting its growth targets. Now it’s clear that the firm’s problems are far from over, I think investors should avoid the business until it reduces debt further, or cuts its dividend. 

Pricing shock 

Another recovery play I’d stay away from is funeral care business Dignity (LSE: DTY). At the end of last week, Dignity shocked the market by announcing that it was slashing the prices of its funerals as competition for deathcare services has intensified. 

City analysts have tried to estimate how much this could cost the firm. Some are calling for earnings to fall by as much as 50% following this move. However, the biggest problem for investors is now uncertainty. Dignity has built its business around acquisitions, consolidating the highly fragmented funeral business. This strategy has paid off,  with net profit rising at a rate of around 11% per annum for the past six years. 

Unfortunately, now earnings are set to come under pressure, Dignity is going to have to deal with a nasty adversary: debt. 

With net debt of £520m on the balance sheet, this now exceeds its market value of £480m, which does not give management much room for manoeuvre. For this reason, I would avoid Dignity until it can improve the balance sheet. 

The post Could Connect Group plc be the next Carillion? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share 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.

In recent years the London-based business has been able to fund chunky payout hikes through the sale of non-core assets. And Stobart suggested that there is much more of that to come. The company said in December: “The group has non-operating asset resources available to support the dividend until 2022 and thereafter, dividends are expected to be funded out of operating profits.”

So despite expectations of a 74% earning slide in the year to February 2018, Stobart is still expected to keep dividends rising at an electrifying rate.

Last year’s 13.5p per share reward is anticipated to leap 28% in the current period, to 17.3p. And as a consequence the FTSE 250 business rocks up with a mammoth 6.2% yield. The good news does not stop here either, with City brokers predicting that the payout will rise an additional 6% in fiscal 2019 to 18.3p. This reading moves the yield to 6.5%.

At first glance, growth investors may be put off by the predicted earnings slump at Stobart this year. But this is expected to be a mere flash in the pan as the company is expected to hit back with a 276% bottom-line improvement next year.

Consequently Stobart’s toppy paper valuation, a forward P/E ratio of 134.8 times, falls to a much-improved 35.8 times for fiscal 2019. Sure, this reading also stands above the widely-accepted value watermark of 15 times or under. But a corresponding sub-1 PEG reading of 0.1 suggests Stobart is actually brilliantly valued relative to its growth prospects.

Another dividend star

Those seeking hot dividend stocks trading for next-to-nothing also need to pay Connect Group (LSE: CNCT) close attention.

Restructuring efforts are finally expected to push the newspaper and magazine distributor back into earnings growth after two successive annual reverses, and a 2% bottom line advance is predicted for the year to August 2018. And this results in a dirt cheap prospective P/E multiple of 7.2 times.

Thanks to its strong balance sheet, Connect has managed to overcome its recent profit woes and keep dividends chugging higher. And supported by this year’s expected earnings recovery and falling levels of debt, the business is anticipated to lift the payout again. The 9.8p per share reward forked out last year is expected to rise 2% in the current fiscal period to 10p.

And as a consequence Connect carries a quite astonishing 8.8% yield.

While the Swindon-headquartered business may have to do a hell of a lot of paddling to overcome tough trading conditions, it remains committed to further streamlining to create a formidable earnings generator in the coming years by concentrating on its core units.

Following on from the summer sale of its Education & Books division for a fee north of £50m, Connect hived off its Books division to Aurelius in December in a deal that could raise another £11.6m to bolster its financial firepower. And this gives me further confidence that the business can meet the Square Mile’s monster near-term dividend projections.

The post One 6% and one 9% yielder I’d buy in 2018 appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild 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.

Diverse businesses

The Swindon-based distribution firm operates a number of diverse businesses in areas such as news & media, parcel freight, education and books. These include Smiths News, the UK’s largest newspaper and magazine wholesaling business, and Tuffnells, the leading parcel delivery specialist.

The group’s shares have continued on their downward trajectory during the course of the year, hitting five-year lows in October, despite a hike in the dividend announced with first-half results at the end of April. So what’s happened? Did I call this one wrong? Is it time to cut your losses and move on?

Dividend hike

No, let’s not be too hasty! I think it’s still worth hanging on to the shares for the longer term. Management has announced two dividends since my recommendation in March, totalling 9.8p per share, higher than the previous year, as predicted. With the depressed share price, that equated to a massive 9.6% yield at the time of the announcement.

Also in its favour is the fact that the sale of the group’s Education & Care division to RM plc, the education resources and software group, was completed at the end of June for £56.5m.The Education & Care division has been suffering from a decline in revenues, and would likely be further impacted by an increase in teacher pension and National Insurance costs that will need to be absorbed by school budgets.

Monster 9% yield

But what about the share price, is it going to recover? I’m pretty confident it will, and here’s why. First of all let’s look at why it continued plunging through to October, before we consider why it’s been staging a comeback since. Investors were frankly unimpressed with first-half results back in April, and perhaps rightly so, with pre-tax profits coming in 5% lower than the previous year, and revenues remaining broadly flat.

Full-year results in October weren’t much better, but this time the market reacted favourably, sending the shares soaring. It seems as though investors liked the fact that after the disposal of its Education & Care division, management is looking ahead to focusing on its News & Media, and Parcel & Fright divisions, developing the capabilities of these businesses to secure further efficiencies and generate organic growth opportunities.

As a result, the City is forecasting an uptick in both revenues and earnings in the current financial year to August 2018, leaving the shares trading on a bargain valuation of just seven times earnings, and offering a monster dividend yield of 9%. At these levels it could be worth holding on to the shares for capital gains along with the promise of even more generous dividend payouts.

The post This unloved 9% yielder could make you very rich appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Bilaal Mohamed has no position in any 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.

Today I’m going to highlight two small dividend stocks I believe could be profitable long-term buys.

A long-term cash machine?

Fulcrum Utility Services (LSE: FCRM) has two main sources of revenue. Much of the group’s income comes from building gas and electricity infrastructure for property developments, such as factories and housing estates.

However, the group is also licenced to own and operate gas and electricity distribution networks, such as those it builds and others it acquires. This business attracts me, as I believe it should provide long-term recurring revenue, in addition to the cyclical income from new-build projects.

Today’s half-year results suggest that both businesses are performing well. Revenue rose by 8.3% to £19.6m during the six months to 30 September, while pre-tax profit climbed 19.4% to £3.7m.

Fulcrum ended the period with an order book worth £33.7m, up by 11% from the end of March. Shareholders will be rewarded with an interim dividend of 0.7p per share, a 17% increase on last year’s payment.

How cheap is the stock?

Fulcrum shares have performed strongly this year and are no longer in bargain territory. But, I think the shares may still be attractive. The company hopes to expand its utility asset ownership, and is expanding its services in the area of electric vehicle charging infrastructure.

Consensus forecasts put the group on a forecast P/E of 16 for this year, with a prospective yield of 3.1%. This valuation is supported by net cash of £14.5m, which now accounts for around 12% of the share price. In my view, the stock remains worth buying.

A sustainable 9% yield?

A dividend of 9% is usually seen as a warning of problems to come. But once in a while, the market throws up a genuine opportunity to lock in a massive income.

I believe Connect Group (LSE: CNCT) could be one such stock. This group’s main business is the distribution of newspapers and magazines to retailers. It also has a parcel business, Tuffnells, and a specialist book-selling unit. Concerns about the group’s future focus on falling sales of newspapers. The company is hoping to adapt to this situation by finding other opportunities for early morning deliveries.

Last year’s results showed resilient trading. Although revenue and profits fell by around 3%, Swindon-based Connect generated earnings and free cash flow of around 11p per share, providing cover for its dividend payout of 9.8p per share.

That’s equivalent to a yield of 9%, at the last-seen share price of 109p.

Crucially, last year’s sale of Connect’s education division enabled management to reduce net debt from £141.7m to £82.1m. I see that as a fairly comfortable level of borrowing relative to the group’s profits, which are running at around £35m-£40m per year.

I’m considering a buy

The outlook for this year is fairly similar. Adjusted earnings of 16p per share put the stock on a forecast P/E of just 6.7, while a forecast dividend of 10p per share should give a yield of 9.3%.

I believe this valuation is probably too cheap, given the apparent stability of the group’s trading.

The post 2 small-cap dividend stocks I’d buy and hold for the next decade appeared first on The Twelfth Magpie.

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Roland Head owns shares of Fulcrum Utility Services. 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.

It goes without saying that electricity is one of those commodities that we Britons cannot go without, regardless of whether or not the domestic economy is failing or thriving. So with GDP growth starting to stutter (this rung in at a pretty-insipid 0.4% for the third quarter), and the never-ending Brexit saga threatening keep economic expansion reined in many years yet, now could prove a sage time to plough into the utilities space.

The likes of Centrica and SSE face an uncertain future, however, as the embattled Conservative government, eager to re-seize the initiative from the Labour opposition, vows to implement price caps on Britain’s leading power suppliers.

National Grid is insulated from the worst of these troubles, however, given that it does not sell electricity to hard-hit consumers, but simply keeps the electricity grid up and running. And therefore its profits outlook is that much more stable.

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Such earnings visibility is of course essential to keep dividends on an upward slant and has given National Grid the confidence to keep raising payouts at a pretty decent lick.

And thanks to the stable operating environment, the City is certainly expecting rewards at the London-based business to keep sprinting higher. The 44.27p per share dividend shelled out in the year to March 2017 is anticipated to rise to 45.3p in the current period, and again to 46.8p next year.

As a consequence, yields for fiscal 2018 and 2019 rock up at a terrific 4.9% and 5.1%, respectively.

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My bullish assessment of big-yielder Connect Group (LSE: CNCT) has also improved immensely in recent days following the release of full-year financials. And so has that of the broader market.

The distribution giant has seen its share value explode 25% since Thursday’s update, share pickers piling in after it said heavy restructuring measures would drive it back into earnings growth from this year.

While market conditions remain difficult at the business (revenues and adjusted pre-tax profits dropped 3.1% and 2.8% correspondingly in the 12 months to August 2017, it advised this week), Connect has now embarked on a two-year transformation drive which will encompass the “comprehensive integration of our core businesses, extending from leadership and central services through to the network and frontline delivery.” Its decision to focus on Early Distribution and Mixed Freight divisions should create a leaner and more effective earnings generator in the years ahead.

Connect kept its record of handsome dividend growth rolling by electing to lift the shareholder reward to 9.8p per share for fiscal 2017, from 9.5p in the previous year. But brokers are predicting that the dividend will shrink in the current fiscal period, to 9.7p per share.

However, this figure still yields a formidable 8.6%. And I believe payout projections could be on the end of meaty upgrades in the months ahead, should restructuring measures begin to bear fruit. Indeed, the number crunchers are expecting earnings to move 7% higher in the current year alone.

The post National Grid plc isn’t the only dividend king I’d buy today appeared first on The Twelfth Magpie.

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Royston Wild 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.