It was only a few weeks from the first profit warning to the announcement that administrators had been called in at Conviviality. And while Carillion’s demise was more drawn out, the company called in the administrators only three days after management announced that the firm remained in “constructive discussions” with creditors.  

When things go south so fast it’s very difficult for the average investor to get out before suffering a total loss. The best solution is it to avoid companies like these altogether, a process that’s easier than it first appears. Indeed, both Carillion and Conviviality had several similar undesirable qualities that were on display long before the initial troubles emerged.

Cash is king

The first red flag for investors should have been the lack of cash flow from these two companies. In Conviviality’s results for the six months to the end of October, the company announced total revenues of £836m and a pre-tax profit of £6.4m. But it generated just £528,000 of cash from its operations. 

Meanwhile, according to a House of Commons report published after the company’s collapse, Carillion generated only £159m of cash from operations between 2012 and 2016. Over the same period, the firm reported a cumulative net profit of £756m and paid a total of £376m to investors via dividends.

The next two red flags are interlinked. Both Carillion and Conviviality had reasonably similar business models. They had to pay suppliers upfront for goods and services, while only getting paid themselves when the job was completed, or product sold. This means they relied heavily on the kindness of strangers, creditors and suppliers. Short-term financing, as well as a good deal of trust, is needed for this type of business model to succeed. 

Unfortunately, when analysts start asking questions about a company’s financial viability, vital financial lifelines quickly evaporate, and so does trust. Therefore, it’s imperative that these types of businesses maintain liquidity, unleveraged balance sheets. Borrowing hundreds of millions of pounds to finance a string of acquisitions is undoubtedly not the best course of action. But this is precisely the course of action both companies decided to take. Carillion and Conviviality borrowed heavily to finance acquisitions, which they struggled to integrate. As debt grew, cash flow only deteriorated.

Cash tells all 

The one factor linking all of these terminal factors is cash. Had both companies focused on cash generation and built a liquid, cash-rich balance sheet, then it’s more than likely that they wouldn’t have failed.

So considering the above, the key lesson to take away from these two disasters is, quite simply, cash is king. As investing is not a precise art, it’s unlikely you will ever be able to avoid suffering a significant loss in your portfolio. However, you can tilt the odds in your favour by avoiding highly levered companies that lack cash resources.

The post How to make sure you avoid the next Conviviality or Carillion appeared first on The Twelfth Magpie.

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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.

However, the company now seems to offer a wide margin of safety which could lead to a rising stock price in future. But it’s not the only stock which could offer growth at a reasonable price. Reporting on Tuesday was another company that could be worth buying right now.

Improving outlook

The company in question is cellular material technology specialist Zotefoams (LSE: ZTF). It reported a record 2017 financial year for sales and profits. Revenue increased by 22% to £70.15m, experiencing strong growth across its business. This helped to push reported profit, before tax and exceptional items, to an all-time high of £8.81m. This is an increase of 22% and shows that the company’s strategy appears to be sound.

During the period, Zotefoams was able to complete its major US capacity expansion investment that’s now producing high-quality foam. The company is also investing in capacity expansion as it prepares for future growth. And while the macroeconomic environment remains uncertain, near-term growth potential remains high.

Looking ahead to its performance in the current year, the stock is expected to record a rise in earnings of 8%. This is expected to be followed by growth of 24% next year. This puts the company on a price-to-earnings growth (PEG) ratio of just 0.9, which suggests that it offers excellent value at the present time. As such, now could be a good time to buy it for the long term.

Recovery potential

Conviviality could also deliver share price growth in future. Certainly, investor sentiment is likely to remain weak in the near term after forecast news was released. This may have hurt confidence in the company’s future prospects and its ability to generate accurate forecasts. However, if it’s able to deliver on its current guidance, then it would be unsurprising for investor sentiment to gradually improve.

With the stock forecast to post a fall in its bottom line of 17% in the current financial year, its share price may remain subdued in the near term. However, with growth in earnings of 2% forecast for next year, followed by 13% in the year after, a turnaround could be on the cards. And with the company trading on a PEG ratio of 0.3 following its recent share price fall, it appears to offer a wide margin of safety.

Of course, the prospects for UK retailers remain challenging. Consumer confidence is low and this could hurt spending levels. But with such a low share price, Conviviality seems to be a worthwhile turnaround stock for the long term.

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Peter Stephens 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.

There isn’t a lot of overlap between stocks that pay a very nice dividend and can also appeal to investors looking for double-digit growth and huge capital appreciation prospects, but that doesn’t mean they don’t exist. In fact, I think one such stock that fits the criteria and is flying under the radar of many investors is off-licence operator Conviviality Retail (LSE: CVR).

Over the past two years the company has recorded year-on-year (y/y) earnings increases of 22% and 49% and its share price has risen over 75% in just the past year. Yet despite this rapid share price growth the company still kicks off a very attractive 3.2% annual dividend yield.

The key to success on each of these fronts has been acquiring rivals, reorganising back office functions and steady like-for-like (LFL) growth due to changing consumer habits. On the acquisition front Conviviality has made two large acquisitions in recent years that have made it the UK’s largest independent wholesaler of alcohol to on-trade customers such as pubs, restaurants and hotels.

This has given the group greater pricing power and also cut overlapping costs, which has led to higher margins and cash flow. In addition to growth in the wholesale trade, the group’s owned and franchised off-licences like Bargain Booze have been performing very well due to consumers increasingly shopping at small, local outlets rather than out-of-town big-box stores. In the year to April these two divisions posted underlying acquisition-adjusted y/y sales increases of 6.4% and 6.1% respectively.  

Including the positive effects of acquisitions, the group’s revenue for the year rose 85% y/y to £1,560m while improved margins led to EBITDA more than doubling to £60.9m. And with net debt of just £95.7m at year-end and free cashflow quadrupling, management was able to increase full-year dividends by 33% to 12.6p.

Looking ahead, the positive benefits of increased scale should allow Conviviality to increase the number of items it offers to wholesale customers, improve its bargaining power with suppliers and customers alike and expand into new markets. While the company’s shares are looking a little pricey at 17.2 times forward earnings, Conviviality is one dividend growth star I’m definitely interested in.

A small-cap turnaround opportunity 

A smaller and riskier option that could also appeal to both types of investors is £50m market cap European patent attorney Murgitroyd (LSE: MUR), which offers a 3.2% yield and has recently returned to earnings growth.

The company was hit in H1 by falling profits due to complications from an acquisition that resulted in significant increases in business development and IT costs. However, the group believes these will be one-offs and the fact that H2 saw the company return to year-on-year pre-tax profit growth suggests this may be the case, although it’s still too early to be completely certain.

Over the medium term, the group’s growth prospects appear quite appealing as it expands the number of services offered to corporate customers filing EU patent applications. Furthermore, with both the European Patent Office and EU Intellectual Property Office seeing respectable single-digit growth in the absolute number of applications in 2016, Murgitroyd is benefitting from steady overall market growth.

With profitable operations, cash on hand, its shares valued at 16 times forward earnings and well-covered dividend payouts, I believe Murgitroyd could prove an interesting dividend growth stock if it can sort out its internal issues.

The post 2 under-the-radar dividend growth stocks appeared first on The Twelfth Magpie.

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Ian Pierce 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.

Since the company’s European invasion was announced at the beginning of 2014, shares in Cineworld have added nearly 60% excluding dividends. Including profit distributions, shareholders have seen a return of around 100%. And it looks as if the growth is only just getting started. 

Just getting started 

Having conquered Europe, the firm is expanding its international presence, as well as using its size to consolidate in existing markets. 

During the first half of 2017, as admissions grew 10% year-on-year, the company opened two new sites, Ely in the UK and Zichron in Israel taking its footprint to 2,136 screens by 30 June. Management also announced the acquisition of the 16 screen Empire Newcastle site. A further 11 developments are slated for completion by year end. 

Cineworld’s global expansion, coupled with the firm’s VIP customer offering is helping it expand at a rapid clip. Also, the company has been able to reduce its reliance on blockbuster film takings with the addition of IMAX, 4DX and VIP seats, which are helping to boost margins and accelerate earnings growth. For the first half, as admissions grew 10%, EBITDA expanded 12.9%. City analysts are expecting earnings per share growth of 9% for 2017 and 8% for 2018. 

Unfortunately, due to its past performance, shares in Cineworld trade at a premium P/E of 16.7.  This might seem expensive, but considering the company’s growth potential, I believe this multiple is not overly demanding. 

Market leader

Shares in Bargain Booze owner Conviviality (LSE: CVR) have gained nearly 80% over the past 12 months, and once again I believe that this company’s growth story is only just beginning. 

Conviviality’s sales for the 52 weeks to 30 April nearly doubled as the company completed the acquisition and integration of Bibendum PLB Group. Analysts are expecting the group to report a pre-tax profit of £53.2m for the fiscal year ending 30 April 2018 indicating that the firm is on track to grow pre-tax profits 10 times in the past five years.  

This steady growth should continue as Conviviality sits in an unrivalled position supplying more than 25,000 customers with 10,000 different products. The company dominates the UK’s alcohol distribution network and can achieve economies of scale not available to smaller peers. 

Premium growth 

Shares in Conviviality trade at a forward P/E of 17.2, which is quite expensive. Nonetheless, over the past four years the firm has shown that it has what it takes to grow in the UK’s competitive retail market, and now that the business has a market-leading position, it should be able to outperform its peers for years to come. As a bonus, the shares currently support a dividend yield of 3.3%. 

The post 2 growth stars that are only just getting started appeared first on The Twelfth Magpie.

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Rupert Hargreaves 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

But I needn’t have worried, as today’s full-year results showed the purveyor of high-end coats and bags is still looking good, despite the tightening retail situation. The firm’s global reach is partly to thank for that, with 39% of its 2016/17 revenues coming from the Asia Pacific region, 25% from the Americas, and 36% from the rest of the world — UK sales make up only a tiny portion.

And though the Hong Kong and US markets were described as challenging, Chinese sales are recovering, and the company saw a 3% rise in retail revenues — though with wholesale down we saw a 2% drop in overall revenue.

Global transition

Underlying adjusted pre-tax profit did fall by 21%, with the company in a transition phase and engaging in some cost-cutting — not to mention the current chief executive Christopher Bailey set to stand down in favour of Marco Gobbetti in July. We’re also facing a reversal this year of the 10% boost provided by the fall in the pound, so we are in uncertain times.

But cash flow was strong, which for me is a key characteristic of this high-margin luxury retailer, and we saw a rise of £149m for a year-end net cash figure of £809m.

The dividend was lifted by 5% to yield 2.3%, and £150m in share buybacks was completed — with a further £300m on the cards for this year.

And that cash flow is what I really like about Burberry. It strengthens my confidence in the company as a solid provider of both dividends (modest but well-covered and progressive), and earnings growth at P/E multiples of 18-20, which I’d say is probably about right for the long term.

Closer to home

While I never buy anything from Burberry, I’m a regular customer of Conviviality Retail (LSE: CVR). The company, you see, owns Bargain Booze and Wine Rack, among other alcoholic beverage distribution operations.

Conviviality only listed on AIM as recently as 2013, and since then we’ve seen the share price gain 132% to 320p, with the start of a period of forecast earnings growth in 2016 giving it an extra boost — over the last two years the price is up 120%.

The year to April is expected to bring in a 40% rise in EPS, putting the shares on an attractively low PEG of 0.4 and a not-at-all-stretching P/E of 16. First-half results to October suggest that’s well on track, with revenue up 211%, adjusted pre-tax profit up 295%, and adjusted H1 EPS up 89%. If anything, the upbeat full-year forecast might actually turn out to be on the conservative side. 

The acquisition of Matthew Clark and Bibendum have moved Conviviality’s prospects up a notch, I reckon, and I think it sets the scene for a good few years of both growth and income. As well as the firm’s attractive growth valuation, dividends are predicted to yield better than 4% and should be rising significantly ahead of inflation.

What drawbacks do I see? Net debt stood at £138.4m at the halfway stage, though that was down a little and is well within the firm’s EBITDA bank covenant, and it’s not too risky for a company with six-month revenues of nearly £800m.

Overall, I see another attractive long-term growth and income combination.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. 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.

The FTSE 100 may have pulled back slightly since Theresa May’s snap general election announcement on Tuesday but valuations across London’s main index are still looking stretched to me. That’s why I’ve been digging into the mid and small-cap indices to find great shares that still trade at reasonable valuations. And I think I’ve found one in fast growing alcohol distributor and retailer Conviviality (LSE: CVR).

A highly reliable industry

Despite rising over 40% in the past year, the company’s shares still trade at a relatively reasonable 14.5 times forward earnings and offer a solid 3.8% dividend yield, all while analysts forecast double-digit earnings growth for this year and next.

These forecasts seem eminently achievable for Conviviality given the company’s high levels of organic growth and big recent acquisitions that have consolidated its position in the alcohol distribution market across the UK. In the half year to October, the company’s revenue rose 4.4% on a like-for-like basis while acquisitions boosted the top line 211% year-on-year and led EBITDA to improve by 252%. Even more impressively, the acquisitions didn’t stretch the balance sheet and in fact lowered net debt to £138m, or 2.19 times EBITDA.

As these acquisitions are integrated the company expects significant synergies due to lower costs and improved pricing power that comes from serving over 25,000 restaurants, bars and hotels. This means margins, cash flow and earnings should all rise in the coming quarters.

On top of the fast growing distribution business the company also has 716 franchised stores operating under the Bargain Booze and Wine Rack brands. In H1, sales from these outlets rose 2.5% year-on-year reflecting consumers shift towards shopping at small local stores and looking for value.

With good growth in both major business lines, significant cost-cutting potential, well covered dividends and an attractive valuation I believe Conviviality is one growth share investors should keep an eye on.

A riskier option

Another retailer this is growing nicely, offers a solid dividend and trades at a reasonable valuation is pawnbroker H&T (LSE: HAT). The company has recently been shrinking its estate by closing unprofitable stores, which has helped increase earnings by double-digits in each of the past two years.

And although analysts are forecasting earnings increases of 8% and 20% in the next two years respectively, the company’s shares still trade at only 13.5 times forward earnings and bring a 3% yielding dividend.

Even though shrinking the number of stores may seem an odd way to grow, it is working well for H&T as it has allowed management to concentrate on adding additional services such as foreign exchange, online personal loans and electronics buybacks that have proved popular with consumers and profitable. Rising gold prices have also helped boost margins, but while very nice, this is a volatile and unpredictable source of profits in the long term.

The company is also benefitting from increased regulatory scrutiny of the sector by the FCA. This is increasing compliance costs for smaller competitors, which they will have to pass on to competitors. However, large players such as H&T will be able to absorb these costs and expand market share.

H&T is growing nicely, improving margins, maintains a very healthy balance sheet and has plenty of room to increase already substantial dividends. With it shares trading at an attractive valuation, risk-hungry investors may want to take a second look.

The post 2 top growth stocks trading at bargain valuations appeared first on The Twelfth Magpie.

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Ian Pierce 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.

Improving performance

Reporting on Monday was LED lighting specialist Luceco (LSE: LUCE). Its results for the most recent financial year show that it made encouraging progress, with revenue moving 29.8% higher and operating profit rising by 30.4%. The company was able to grow revenue across all of its product categories, which show that its current strategy appears to be working well. It reported improved gross and operating margins while expanding its manufacturing capacity in the wholly-owned Chinese facility.

Looking ahead, Luceco appears to have a bright future. Its pipeline includes a number of new product launches, while the ongoing investment in its expanded sales teams and new sales offices in Spain and Hong Kong could positively catalyse investor sentiment. In fact, earnings growth of 17% in the current year and 21% next year are currently forecast. This puts the company’s shares on a price-to-earnings growth (PEG) ratio of just 0.8, which indicates that now could be the perfect time to buy them.

As well as high potential rewards, the risks from investing in Luceco appear to be declining. It was able to reduce net debt from £46.1m in 2015 to £29.4m in 2016. This reduces net debt/adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) to 1.4 times. This should improve its overall performance in a period where interest rate rises are becoming increasingly likely.

Resilient growth

While a number of UK-focused retailers are forecast to record falling bottom lines this year, Bargain Booze owner Conviviality (LSE: CVR) is expected to buck the trend. Its earnings are forecast to rise by 15% in the current year, and by a further 8% next year. This shows that the company’s business model may be more resilient than the wider retail sector. As such, at a time when inflation is rising and may even surpass wage growth this year, Conviviality could be a shrewd buy.

Despite its robust outlook, the company trades on a PEG ratio of just 1.4. This seems to be a fair price to pay given its stable growth outlook, and indicates that share price appreciation could be high. And since Conviviality offers a dividend yield of 5.1%, its total return could easily surpass that of the wider index over the medium term.

In fact, with dividends being covered 1.7 times by profit, there is scope for them to rise by at least as much as profit growth in the coming years. This could increase demand for the company’s shares, since they appear to offer a potent mix of income, value and growth appeal.

The post 2 exciting growth shares I’d buy right now 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?
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• 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?

Peter Stephens 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.

Dividend delights

Back in January, drinks wholesaler, distributor and owner of Wine Rack, Conviviality (LON: CVR) released a very positive set of interim results to the market.

In the 26 weeks to the end of October, revenue at the Crewe-based business rocketed 211% to £782.5m and profits before tax flew 285% higher to £7.4m. With all three units (Direct, Retail and Trading) performing well and recent acquisitions being integrated ahead of schedule, the company now expects to deliver synergies of £6m in FY17.  

Trading on under 13 times earnings for 2017, Conviviality’s shares still look great value to me, particularly when compared to highly valued industry peers such as Diageo. What’s more, they come with a rather chunky 4.7% yield that’s forecast to rise even higher in 2018, assuming earnings estimates are achieved. 

Big Game

Another top dividend share would be Games Workshop (LSE: GAW). A big exporter and major beneficiary of sterling’s slump, the £303m cap fantasy figurine maker also released a cracking set of results in January.

From May to November last year, revenue hit £70.9m — a 28% increase compared to the same period in 2015. Thanks to excellent performance in both retail and trade channels, the company also announced pre-tax profits of £13.8m — a rise of more than 50%.

Yours for 14 times earnings (despite almost doubling in price over the last year), shares in Games Workshop currently offer a yield of over 5.8%. For comparison, that’s almost six times what you would get from the best instant access cash ISA on the market. 

My final selection would be housebuilder Crest Nicholson (LSE: CRST).

Back in January, the £1.4bn cap revealed revenues of £1bn for 2016 (a rise of 24% on the previous year) and pre-tax profits of £195m (up 27%). Even more impressively, the company managed to move into a net cash position of £77m — a dramatic improvement on the £30.6m of net debt on the balance sheet in 2015. With consistently impressive annual returns on capital and high operating margins, Crest also bears many of the hallmarks often seen in quality businesses.

Trading on just eight times earnings for 2017 and boasting a price-to-earnings growth (PEG) ratio of just 0.8, shares in Crest should to appeal to both value and growth hunters. But what about those dividends?

For 2016, Crest raised the total payout by 40% to 27.6p. This year, it’s forecast to grow by another 23%, giving an easily covered forecast yield of 6.1%. There aren’t many stable companies in the market offering that kind of payout.

Buyer beware

As things stand, all of the above would be great choices for dividend-focused investors. Better still, if this income isn’t needed at the current time, choosing to reinvest these payouts back into the market could be an excellent, wealth-generating decision thanks to the beauty of returns compounding over time.

That said, nothing stays still in the markets and one does need to consider the possibility of increased volatility over the next few months as Theresa May comes closer to triggering Article 50. 

Speaking of which…

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Paul Summers owns shares in Conviviality. 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.

In the 26 weeks to 30 October, revenue at the Crewe-based business jumped a stonking 211% to £782.5m with gross margins up 2.5% points to 12.5%. Profits before tax rocketed 285% to £7.4m and free cash flow increased by 18% to an outflow of £9.2m.

On an operational level, Conviviality stated that sales were 4.4% above the corresponding prior period with all of its three units (Direct, Retail and Trading) performing well. Recent acquisitions (Matthew Clark, Peppermint and Bibendum PLB Group) had been integrated ahead of schedule and the company was now on track to deliver synergies of £6m in FY17.

Beyond today’s figures, there are lots of other reasons for taking a closer look at the owner of Wine Rack and Bargain Booze.  

Trading on a price-to-earnings (P/E) ratio of below 13 for 2017 (reducing to just under 12 in 2018), shares in Conviviality still look an absolute bargain. A price/earnings-to-growth (PEG) ratio of just 0.72 for 2017 also means that investors are getting a lot of growth for their money.

But Conviviality shouldn’t just attract those searching the market for value. As far as dividends are concerned, it rivals many of those in the market’s top tier. Not only does it offer a safely-covered yield of 4.8% for 2017, this is expected to rise to 5.4% in 2018. Today’s announcement that the interim dividend will be hiked a full 100% to 4.2p gives some indication of just how rewarding Conviviality’s shares could be for income investors over the next few years.

Bigger but better?

If small cap shares aren’t your scene but you subscribe to the view that people will still consume consistent levels of alcohol regardless of the economic climate, perhaps drinks giant Diageo (LSE: DGE) might be more to your liking. Thanks to strong organic growth and favourable exchange rates, the owner of sticky brands such as Smirnoff, Baileys and Captain Morgan announced a better-than-expected 4.4% increase in net sales last week. Operating profit rose 28% to just above £2bn in the six months to the end of December. 

Thanks to post-referendum anxiety, shares have been on something of a roll over the past seven months, climbing 28% from 1,748p to 2,244p. Now trading on 21 times earnings for 2017, shares in Diageo aren’t exactly cheap and they’re certainly a more expensive option than those of Conviviality. In addition to being far less generous with payouts than the small cap, a yield of under 3% is also well below what some its FTSE 100 peers are offering.

Is Conviviality a better purchase than Diageo? I think this really depends on your investing strategy, attitude to risk and your perception of the macro-economic outlook. Those concerned by what 2017 will bring may be attracted to Diageo for its size, geographical diversification and higher operating margins (just over 28% in 2016) while also accepting that shares in this metaphorical ‘elephant’ of the stock market are extremely unlikely to gallop any time soon. 

That said, those unfazed by broader market movements, attracted to value or on the hunt for companies offering high but also sustainable dividend yields may wish to pour some of their capital into Conviviality.

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Paul Summers owns shares in Conviviality. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Deeply undervalued

Shares in automotive retailer Pendragon (LSE: PDG) have not had an easy run of late. Since the start of the year, the value of the company’s shares have fallen by 35% on concerns over a potential slowdown in new car sales following the Brexit vote.

However, despite the economic uncertainty created by the June referendum outcome, consumer confidence has held up more resiliently than many economists had previously expected. Likewise, Pendragon’s revenue growth defied earlier expectations. The group’s sales grew 5.7% on a like-for-like basis in the third quarter of 2016, despite a strong comparator last year, while underlying pre-tax profit increased by 6.3%.

City analysts expects Pendragon will deliver earnings growth of 6% for the full-year 2016, with a further 5% growth pencilled in for next year. Based on these estimates, shares in the company seem deeply undervalued, trading at a forward P/E of just 7.8 this year, and falling to 7.4 times for 2017.

Shares in Pendragon currently yield 4.3%, with its dividend being well-covered by earnings and free cash flow. It is on track to deliver full-year dividend growth of at least 9%, with significant further growth likely to come over the next 3-5 years.

Earnings per share covered its dividend by more than 2.8 times last year. And even with this year’s expected 9% dividend growth, dividend cover will likely remain over 2.7 times for this year. Moreover, Pendragon has in place a £20m share buyback programme, with £6.1m already purchased as of 25 October.

Transformative acquisitions

Drinks retailer and distributor Conviviality (LSE: CVR) is delivering a strong performance across all divisions. Group revenues for the first half of its 2016/7 financial year more than tripled to £783m, thanks to robust organic growth in the period and synergy gains from recent acquisitions.

Lately, the company has been expanding rapidly into the wholesale and events business, and has made three big acquisitions over the past year: Matthew Clark, Peppermint and Bibendum PLB Group. These acquisitions have helped it to lower costs through growing scale and expand its wholesaling expertise into new markets and channels.

Following these transformative acquisitions, city analysts are becoming more sanguine on the outlook for the company. Their earnings forecasts have been steadily rising over recent weeks, and they now expect the company to deliver underlying EPS of 39% this year, with a further expansion of 17% for 2017/8.

This means shares in Conviviality currently trade on a 2016 forecast P/E of 10.0, falling to a P/E of 8.6 for 2017. Dividend growth is expected to remain at double digit percentage levels too, with shares trading at a prospective yield of 6.1% this year, and 6.7% on its 2017/8 forecast — that’s a significant improvement on its current yield of 4.7%.

The post Are these the best small-cap dividend stocks? appeared first on The Twelfth Magpie.

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