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.

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

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.

Passive income for my Stocks and Shares ISA

When searching for dividend stocks, I always look at their track records to see whether the payments have been reliable. After all, there is no point in buying shares of a high-yielding business if that dividend is likely to be cut later.

This is how I stumbled across Devro (LSE:DVO). The company manufactures and sells collagen sausage casings. As unglamorous and boring as that sounds, it has proven to be an incredibly resilient business.

The pandemic created a challenging operating environment, and Devro’s Chinese facilities suffered continual disruptions. Yet despite this, the total revenue for the year only fell by 1%. And upon closer inspection, this drop appears to be linked to a slight decline in sausage prices rather than any problems with production volumes.

Devro is by no means a growth stock. But it’s certainly been acting like one lately. Over the last 12 months, the share price has increased by nearly 50%, rising far higher than its pre-pandemic levels. Combining that with an average annual 8% growth in dividends over the last 20 years makes Devro look like an excellent candidate for my Stocks and Shares ISA.

Risks to consider

Collagen is the primary ingredient in all of Devro’s products. It has established long-term contracts with specialised suppliers. But it is still exposed to potential supply chain disruptions and price fluctuations. The ingredient currently represents around 20% of the firm’s operating expenses. Therefore even small increases in price could have a significant impact on profit margins.

The firm also has to comply with food and safety regulations across multiple countries. These are in place to protect the health of Devro’s customers. But any changes could result in restricted product movement between territories and introduce complications to the manufacturing process. If the company cannot keep up with changing standards or accidentally breaches them, it could lead to competitors taking advantage and stealing market share.

The bottom line

Despite the rising share price, Devro still offers an attractive 4.6% dividend yield to its investors. That looks particularly enticing to me for my passive income portfolio, especially since the firm hasn’t cut or suspended any payments in over 20 years.

With the 2021 dividend already declared, and the demand for sausages not disappearing any time soon, I’m definitely considering adding the company to my Stocks and Shares ISA before the new tax year.

The post 1 passive income stock I’d buy before the Stocks & Shares ISA deadline 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?

Zaven Boyrazian does not own shares in Devro. The Motley Fool UK has recommended Devro. 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 the week has evolved, the chances of the UK falling off the cliff edge and embarking on a destructive ‘no deal’ Brexit have been steadily growing. Rather than stamping on the reverse pedal, though, Downing Street has doubled-down on its high-risk game of bluff with Parliament that could see the country exit the European club without an agreement.

Theresa May’s aggressive pitch to the nation last night was intended to concentrate MPs’ minds on passing her Withdrawal Agreement on the third time of asking. Her tactic of pitting the public against Parliament, though, appears to have spectacularly backfired and undermined her chances of getting her plan through the Commons — should it even be allowed to be debated by speaker John Bercow — thus increasing the chances of a ‘no deal’ conclusion to this turbulent political saga.

International colossus

There’s clearly a lot for investors to worry about right now, and if you’re one of those concerned over the unfolding Brexit saga then you might want to give SThree (LSE: STHR) a close look today.

It’s not that the recruitment giant would be immune to the possible troubles created by a disorderly withdrawal. However, given that the business generates just 15% of group gross profits from these shores it’s in a better shape than many to ride out any potential economic turbulence in the near term and beyond.

In fact, I would argue that the rate at which SThree is making progress abroad should encourage investors to believe that it can deliver stupendous profits growth, irrespective of how Brexit pans out. In the three months to February, profits from Continental Europe, responsible for almost six-tenths of the group total, jumped 12%. And in its second-largest market of the US, these climbed 17% year-on-year.

It’s no shock that City analysts expect chunky profits growth at the small-cap through to the end of fiscal 2021, then, and for dividends to keep rising as well. Thus SThree carries jumbo yields of 5.5% and 5.5% for this year and next respectively.

More meaty dividends

Sausage casing maker Devro (LSE: DVO) is another great income pick for those fearful about the future of the UK economy.

Why? Well thanks to the impact of its Devro 100 restructuring plan, sales of its edible products are surging in hot growth markets and should continue to do so as new products like its Fine Ultra hit the market. Volumes in North American and Latin America grew 8% and 9% respectively in 2018, for example, while in South-East Asia these rose 6%, and in China 5% (excluding legacy products).

And there’s plenty of opportunity for Devro to keep growing sales as wealth and population numbers rise on a global level. This is why City analysts predict sustained earnings expansion over the next couple of years at least here, and that the company will also keep growing dividends. Consequently yields sit at an impressive 4.7% for this year and 4.9% for 2020.

The post 8 days to go! I think these 5% dividend stocks could protect you from a destructive Brexit 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 owns shares of and has recommended Devro. 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.

But I think investors should make the most of the share price falls that happened around the time of November’s release and treat this as a buying opportunity. A growing global population is creating more mouths to feed, and particularly in emerging regions where Devro is spending big to expand its footprint, and of course which are territories where wealth levels are rocketing.

Sure, Russia may be problematic now, but the huge potential of Devro’s developing territories was underlined in November’s release in which it said in the four months from July 1 it had seen “strong volume performances” in particular in Latin America and South East Asia, as well as  North America.

Those problems in Russia haven’t dented City predictions of soaring earnings growth for the small-cap in the near-term and beyond. The number crunchers expect earnings growth of 19% for 2018, and for this to be followed with additional rises of 12% this year and 10% in 2020.

Meaty profits AND dividend growth

Devro’s share price dive to multi-year lows leaves it on a rock-bottom forward P/E ratio of 9.7 times, much too cheap in my opinion given the bright long-term demand outlook for its collagen products and the rate at which it is increasing capacity.

This is not the only reason to dive in, in my opinion. As I said, Devro is a share that is particularly suitable for those seeking exceptional income flows from their investment portfolios.

And expectations of solid profits growth mean that shareholder payouts are anticipated to keep marching northwards through to 2020, resulting in dividend estimates of 9.6p per share for this year — up from an expected 8.9p for 2018 — and 10.2p for next year. Such projections yield a monster 5.9% and 6.3% respectively.

Safe as houses

Another exceptional, and little known, dividend stock that can be bought today for under £10 is MJ Gleeson (LSE: GLE). It offers great value for money too, the housebuilder boasting an undemanding forward P/E ratio of just 12.4 times.

I’ve spoken long and hard about how construction stocks are unjustifiably cheap and unloved right now, and latest trading details from Gleeson deepened my resolve. It said last week that “strong demand for our low-cost homes” has continued, “supporting both increased build activity on existing sites and the opening of new sites across our target geographic area.”

It’s a performance that’s hardly a surprise given the massive homes shortage in Britain. A market imbalance that City analysts predict will deliver earnings growth of 6% in the year to June 2019 and 11% in the following fiscal period, and one that will keep dividends on a northwards path as well.

A projected 33.6p per share reward for this year yields 4.6%, and the dial moves to 4.8% for fiscal 2020 thanks to the predicted 35.3p dividend. During the past five years, shares in Gleeson have returned some 17% per year, meaning an initial £5,000 investment would leave investors sitting on a handsome £11,000 today. I believe that market conditions should remain favourable enough for it to keep on creating brilliant returns and this, added to the mighty impact that compounding brings, could make some investors millionaires if they hold on to the shares in the decades ahead.

The post An unknown dividend stock, priced under £10, that I think could make you a million 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 owns shares of and has recommended Devro. 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 track record

Over the past five years, the producer of collagen products for the food industry has struggled to generate revenue growth. A number of factors have weighed on performance, including uncertain demand and increasing competition. For example, in a trading update published today, the company informed investors that due to the “impact from Russia’s economic and currency environment, and the slightly lower than anticipated ramp-up rate of our new Fine Ultra platform,” sales volumes of edible collagen casings are weaker than expected.

But the reason why I believe that Devro is a great stock to include in any pension portfolio is the defensive nature of the business. Global food demand is only increasing and, while the company might have had a rough time of it over the past three years, I reckon the firm should thrive over the long term as it profits from the world’s ever-expanding food demands.

Nevertheless, management is coping well with all of the headwinds facing the group. To deal with falling demand in Russia, cost-saving initiatives are under way, and this means management’s full-year targets remain in place.

Efforts to help stabilise the business over the past five years have enabled the group to maintain its dividend distribution to investors. And while it has been touch and go over the past three years, analysts are expecting the cover to return to a comfortable 1.7 times in 2018, which gives me confidence that this payout is sustainable. 

Right now, the shares support a dividend yield of 5.5% and trade at a relatively undemanding forward P/E of 10.2. 

Margin of safety 

As Devro has floundered in recent years, homebuilder Redrow (LSE: RDW) has seen its profits surge five-fold thanks to booming demand for homes in the UK. 

However, it is difficult to tell at this point if firms such as this will continue to grow at the rate they have done over the past few years in the next few. The outlook for the UK housing market is mixed, and I believe the same could be said for developers.

That being said, shares in Redrow already appeared to be priced for the uncertainty. Right now they are changing hands for just six times forward earnings, a multiple that in my view significantly undervalued the business and its prospects. On top of this attractive valuation, the shares offer a dividend yield of 5.3%, which is supported by a positive net cash balance of £63m.

In my opinion, Redrow’s discount valuation gives a wide margin of safety for investors buying the stock today. We don’t know what the future holds for the UK housing market, although over the long term we know that demand for houses will only increase.

So, even if Redrow struggles in the near term, over the long run, investors should profit. In the meantime, there’s a 5.3% dividend yield on offer.

The post 2 proven dividend growth stocks I’d buy to beat the State Pension 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 owns shares of and has recommended Devro. The Motley Fool UK has recommended Redrow. 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.

Britain’s small-cap index is jam-packed with exceptional income shares so I’ve picked out even more for you to consider, placed in no particular order. Count them down; you won’t be disappointed.

6. International Personal Finance

International Personal Finance’s(LSE: IPF) share price has spiked in recent sessions amid news of better-than-expected collections in its European marketplaces in the first six months of 2018, a situation that prompted the doorstep lender to advise that full-year profits would beat all forecasts.

While impressive, it is the huge revenues possibilities over at its Mexican home credit and IPF Digital arms that I am really excited about — the amount of issued credit in these areas rose 13% and 44% respectively during January-June, and demand here looks set to continue booming.

Now City analysts are expecting the dividend to remain on hold at 12.4p per share yet again in 2018. The good news is that this figure still yields 5.2%, however.

To put an even bigger smile on your face, International Personal Finance is expected to bounce back into earnings growth in 2019, meaning that the Square Mile is confident that the firm should lift the dividend to 12.6p. This means that the yield stomps to a staggering 5.3%.

5. 4Imprint Group

The yields at 4Imprint Group (LSE: FOUR) may not be as mesmerising as those of International Personal Finance. But the rate at which dividends are growing (up 111% over the past five years alone) should make income-seekers sit up and take notice.

It’s not likely that dividend expansion is set to slow any time soon either, given the rate at which its cups, bags and other promotional products are being snapped up. Revenues grew 16% and order intake jumped 15% year-on-year during the first four months of 2018, and a strong US economy should help sales to keep spiralling skywards.

Earnings at the firm are expected to continue swelling by double-digit percentages through to the close of 2019, keeping City brokers expectant of further dividend leaps too. Last year’s 58.1 U cents per share reward is expected to skate to 63.5 cents this year and 72 cents next year, resulting in handy-if-unspectacular yields of 2.5% and 2.8% respectively.

4. Bloomsbury Publishing

The publisher of the Harry Potter series of books, Bloomsbury Publishing (LSE: BMY), can always rely on the evergreen popularity of the boy wizard to keep driving dividends higher.

It may be two decades since the Hogwarts hero first hit bookshelves, but his popularity with young and adult readers alike remains undiminished. The franchise ranked amongst Bloomsbury’s hottest sellers in the four months to June, and the publisher continues to capitalise on its broad acclaim by bringing out new editions on a regular basis.

Harry Potter isn’t the only reason to expect profits and dividends to keep growing, however. The small-cap is also in a good place thanks to the vast amounts it is investing in building its position in the academic and professional digital resources sphere.

With earnings expected to keep rising City brokers are predicting dividend growth to hit as much as 8p per share in the 12 months to February 2019, from 7.51p last year, and again to 8.4p next year. This means that yields stand at an inflation-topping 3.6% and 3.8% for these respective years.

3. Devro

Sausage-casings manufacturer Devro (LSE: DVO) has been forced to keep the dividend locked at 8.8p per share for what appears to be an age. A lengthy period of earnings fluctuations has seen it lack the confidence (and the balance sheet strength) to hike payouts, but things could be about to change.

City analysts expect the firm to deliver robust profits growth through to the end of next year, meaning that Devro is expected to raise the dividend to 9p this year and again to 9.3p in 2019. Subsequent yields clock in at 4.5% and 4.7%.

There’s a lot of reason for the number crunchers to be optimistic. Devro is a rare firm in that it’s seeing its costs dropping through the floor (down £7m in 2017, beating forecasts), at the same time as its sales are marching on, particularly in hot growth territories like Russia and China. There’s a lot to like about Devro and its self-help strategy right now.

2. MJ Gleeson

News that MJ Gleeson (LSE: GLE) remains on course to supercharge home sales over the next five years has got me very excited.

The urban regeneration specialist sold 1,225 properties in the 12 months to June, up by a fifth (or 20.9% to be exact) from a year earlier. It’s well on track to hit its target of 2,000 homes per year within the next five years, it said, and I wouldn’t bet on it missing expectations as it ramps up production (it aims to be active on 70 sites in the course of fiscal 2019 versus 65 today).

Dividends at the firm have jumped 860% over the past five years as earnings have shot through the roof, culminating in last year’s 24p per share reward. Payout expansion is expected to slow in the medium term, however, to 27.1p in the year just passed and 29p in the current year. But the builder and its meaty forward yield of 3.8% are not to be scoffed at, particularly as cash flows burst through the roof and profits look set to keep growing.

1. Headlam Group

Those hunting for blowout yields now and in the future could do a lot worse than splashing the cash on Headlam Group (LSE: HEAD).

A 26p per share dividend is anticipated for 2018, up from 24.8p last year and yielding 5.6%. The yield for next year moves even higher to 5.9%, thanks to the firm’s estimated 27.4p payment.

The floorcoverings giant has been hit more recently by tough conditions in its UK marketplace in 2018 so far, but its divisions in continental Europe continue to perform well. Like-for-like sales in Europe edged up by 1.8% in the six months to June. And it is a combination of robust economic conditions on the continent, plus the completion of Headlam’s shrewd acquisitions at home and abroad, that make me confident that this is one business that could provide you with a packet to retire on.

The post 6 small-cap dividend stocks that could be millionaire-makers 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 owns shares of and has recommended Devro. 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.

Thanks to its multi-year Devro 100 growth strategy, designed to supercharge sales growth and slash costs, the business has seen revenues from emerging markets rebound sharply, and especially from China, Russia and South East Asia.

The strong progress the sausage casings maker is seeing in these territories was underlined by latest trading details released this week in which the firm said: “The Devro 100 programme continues to progress well, with actions on track to deliver the targeted cost savings for the year.” It added that it made “good progress” with its productivity and output targets at its US plant, while its China factory continues to “perform well” too.

Porky dividends

My optimistic take on Devro’s profits outlook is copper bottomed by City analysts’ consensus, which also suggests strong earnings growth from here. Indeed, rises of 12% are forecast for both 2018 and 2019 respectively.

Current forecasts leave the business dealing on a forward P/E ratio of 15.4 times, a pretty undemanding valuation in my opinion, given that its revenues-boosting plan is clicking through the gears and population increases will likely deliver strong demand growth for its edible collagen tubes.

It is in the dividend stakes where Devro really sets itself apart, however. With the business finally on course for sustained profits growth again, and cash generation also steadily improves, dividends are expected to get moving again after years of being locked at 8.8p per share.

A 9.1p reward is forecast for 2018 and this jumps to 9.4p for next year. As a consequence, yields stand at a chubby 4.2% and 4.4% for this year and next.

Take this advice

Investors on the hunt for punchy payout growth should also pay Gateley Holdings (LSE: GTLY) close attention today.

Supported by broker predictions of further earnings growth with rises of 16% and 7% predicted for the years to April 2018 and 2019, dividends are expected to keep growing as well, keeping yields well above the market average.

A 7.1p per share reward is estimated for the current period, up from 6.6p last year and yielding an impressive 4.5%. And the 7.5p dividend anticipated for next year drives the yield to 4.8%.

An added bonus for those considering Gateley is that the business trades on a forward P/E ratio of 14.4 times, comfortably inside the accepted value terrain of 15 times or below.

And this rating is far too cheap in my opinion. Demand for Gateley’s legal and professional services continues to grow at a splendid rate, and the business remains dedicated to building scale to keep business rolling in (its headcount swelled 6.4% year-on-year during July-December to 763).  I reckon the AIM-quoted company is in great shape to deliver solid profits and dividend growth in the years ahead.

The post 2 dividend stocks I’d buy and hold for the next 50 years 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 owns shares of and has recommended Devro. 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.

Many different factors have helped contribute to the company’s lacklustre performance. These include increased competition, rising prices and the group’s operational issues. Thanks to these issues, City analysts expect the firm to report earnings per share of 15p for 2018, down by around a quarter from 2013’s figure of 20p.

Time to grow? 

Over the past decade, Devro has undergone a significant transformation. It has moved from being a series of regional subsidiaries into a single, globally-focused, organisation, concentrating on the production of edible collagen. However, it is not the only business operating in this market and competition has been a severe headwind to the group.

It looks to me as if the hostile operating environment is going to continue for some time, based on a trading update published by the group today. Specifically, while the update does say that the company is on track to meet management expectations for the full year (based on Q1 trading), it lacks any quantitative information. It finishes with the conclusion that “the board remains confident that Devro is well placed to make good progress in 2018.“

Personally, this announcement does not fill me with confidence and leaves me concerned about the company’s ability to hit the City’s target to grow earnings per share by 20% for 2018 to 14.9p. 

So overall, even though Devro’s 4% dividend yield might look attractive to income investors, I would steer clear of the shares for the time being until management can prove that the business is expanding again.

Rising debt 

Another 4% dividend yield I’m wary of is that of John Wood (LSE: WG). Like Devro, its trading fortunes have been mixed over the past five years as the oil services company has struggled with broader sector headwinds. And while it now looks as if the oil industry is in recovery mode, this is not enough to convince me that the firm’s dividend outlook has improved. 

Even though the dividend is set to be covered 1.6 times by earnings per share in 2018, assuming the group can hit City growth targets, the acquisition of Amec Foster Wheeler in October has pushed debt up to 2.4 times EBITDA, reducing fiscal flexibility. Management’s principal goal is now to reduce debt while trying to integrate the two businesses. 

Plenty of companies have failed at this stage of integration, and I’m not entirely convinced that John Wood will be able to pull it off without any mistakes, especially when earnings are hostage to the highly volatile oil and gas industry.

Considering all of the above, I would avoid the shares. The dividend yield of 4.5% isn’t enough to convince me this is a good income play. Meanwhile, the valuation of 13 times forward earnings looks too demanding, especially considering the uncertainties facing the business.

The post Two 4%+ 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?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Devro. 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.

I’ve been critical of its erratic history, failure to find a way to deliver sustainable earnings and dividend growth and poor long-term share performance. However, such companies do tend to go through phases where they deliver excellent turnaround returns for value investors, who buy low and sell high.

With Centrica’s shares having this month plumbed depths not seen since last century, could now be the perfect time for value investors to jump in for a recovery?

Waiting game

The market had been told, via a profit warning in November, of a poor performance for 2017. The annual results were released last week and the shares have actually advanced a little in response, as the numbers were only as grim as the market expected. Nevertheless, grim they were. Statutory earnings per share (EPS) plummeted 81% to 6p and even excluding all the nasty stuff, adjusted EPS dropped 25% to 12.6p. The board declared a 12p dividend for the third year running, having reduced the payout in each of the two prior years.

At a current share price of 142p, the trailing price-to-earnings (P/E) ratio is 11.3 on the more favourable adjusted EPS number. The dividend yield is a whopping 8.5%.

Chief executive Iain Conn told investors: “I am determined to restore shareholder value and confidence.” However, with the company continuing to bleed customers and the headwinds from political and regulatory intervention in the energy market, I believe things may well get worse before they get better. If so, the dividend would likely be cut (as some analysts are already forecasting) and the share price could fall further. As such, I’m continuing to avoid the stock at this stage.

Skin in the game

Another potential turnaround prospect beckoning investors is FTSE SmallCap firm Devro (LSE: DVO). This company, which has the long-form description “one of the world’s leading manufacturers of collagen products for the food industry” and the short-form version “sausage skin maker,” released its annual results today.

The first year of Devro’s three-year plan to deliver revenue growth and cost savings across its global operations has progressed well, with the company delivering a top-line advance of 7% thanks to increased volumes. It exceeded its cost reduction target and underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased 9%.

However, EPS dropped to 12.5p from 13.3p. This was due to higher finance costs, which will begin to fall, because the company has completed major capital investment projects. As it is, strong cash generation in 2017 saw net debt reduce to £135m from £154m and the net debt-to-EBITDA ratio come down to a healthier 2.1 from 2.7.

At a share price of 199p (little changed on the day), Devro’s trailing P/E is 15.9 and its dividend yield is 4.4% on a maintained 8.8p payout. In my view, the business is now well positioned for strong earnings and dividend growth in the coming years and I rate this turnaround stock a ‘buy’.

The post Centrica plc isn’t the only turnaround stock on offer today appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Devro. 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.

Devro’s rally is due to the company recovering from a series of profit warnings that hit late last year due to cost overruns and production problems with its two new factories in China and the USA. These problems briefly ignited fears amongst investors that the company would breach its debt covenants, but thankfully the company is back on track.

In the half year to June, revenue rose 11% year-on-year (y/y) to £125.2m and underlying EBITDA leapt 16.7% to £30.8m. The company is still having teething problems with its US factory but with that facility up and running and the Chinese factory targeting full capacity by year-end, I expect sales and profits to continue growing rapidly.

With start-up costs for the new factories decreasingly rapidly, the company’s balance sheet is also much improved with the net debt/EBITDA ratio down to 2.4 times at the end of June. This has led analysts to forecast the company’s first dividend hike in over four years with a 9.02p full-year dividend pencilled in. This is a very realistic option as the interim payout of 2.7p was well-covered by rapidly rising statutory earnings per share of 5.5p for the period.  

The global market for collagen casings continues to grow in the mid-single-digits every year and Devro’s brand new factories will allow it to gain share in this growing market by offering customers more complicated products than competitors and at a better price. With good growth prospects, a turnaround that’s shaping up to be very robust and a great dividend yield, I reckon Devro is still a great stock to own for the long term.

A local option offering up a great dividend

Shares of convenience store operator McColl’s (LSE: MCLS) have also been on a tear with their value up over 60% in the past year. Yet even after rising so rapidly they still look very attractive to me at 16.6 times forward earnings with a 3.74% dividend yield.

The key for McColl’s has been expansion through acquiring 298 Co-op convenience outlets, plus steady and growing like-for-like sales (LFL) due to changing consumer habits, and a shift towards offering fresh food at its locations. In Q3, 0.7% LFL growth and the addition of the new stores led to revenue rising 31.1% y/y.

Looking ahead, there’s solid potential to further boost LFL sales growth by refurbishing tired newsagents into bright, cheery local food and convenience outlets. In Q3, sales from newly acquired and refurbished shops rose 2.6% on a LFL basis, which bodes well for the rest of the estate as the renovation programme is expanded.  

This programme isn’t cheap but group profitability is still rising with EBITDA up to £16.5m in H1. With net debt at the end of H1 up to £110.8m due to acquisition costs, the company’s dividend will probably remain around its current 10.2p per year for the time being. But with top line and bottom line growth, a decent valuation and an attractive yield, I still think McColl’s is worth considering.

The post 2 high-yield stocks I believe are still worth buying 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?

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Devro. 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.