However, the reality is that no bull market lasts forever. Therefore, it may be prudent for investors to seek defensive, dividend-paying shares such as National Grid (LSE: NG). It may be able to outperform the wider index over the long run, while another dividend stock that released a trading update on Wednesday may also have investment appeal.

Total returns

Although National Grid may not have a track record of generating high earnings growth, the company’s total returns could be impressive in the long run. The stock has a dividend yield of around 5.3%, which makes it one of the higher-yielding shares in the FTSE 100. Furthermore, when it is considered that most of the index’s gains in the last 10 years have come from dividends, buying income stocks begins to have additional appeal.

For example, over the last decade the FTSE 100 has generated capital growth of 2.7% per annum. That’s despite the index enjoying record highs in recent years, and the fact that 10 years ago it was part-way through a bear market. As a result, many investors may have expected stronger capital growth to have been delivered.

Defensive prospects

Although regulatory risk has increased for National Grid in recent years, the company continues to offer a relatively robust investment outlook. Its financial performance is less closely correlated to the wider economy than that of many of its index peers. Should global growth prospects be damaged by the possibility of a trade war or geopolitical risks, for example, the stock could gain in popularity among investors.

Therefore, with its dividends being covered 1.2 times by profit and forecast to grow by 2.7% per year over the next two years, outperformance of the FTSE 100 could be ahead.

Income opportunity

Another possible income opportunity for investors is technology recruitment and outsourcing company Harvey Nash (LSE: HVN). It released a positive trading update on Wednesday which showed that it has delivered gross profit growth of 7% in the first part of the current financial year.

Growth was especially strong in the UK, where gross profit increased by 20%. This was despite uncertainty regarding Brexit negotiations, with a robust growth in the volume of contractors helping to catalyse the company’s performance. And with a survey conducted by the business showing that the proportion of companies reporting budget increases is at its highest level since 2005, its future prospects seem to be bright.

With Harvey Nash currently yielding 4.4% from a dividend that is covered three times by profit, its income potential seems to be attractive. Since the stock trades on a price-to-earnings growth (PEG) ratio of just 0.5, its total return prospects seem to be highly appealing at the present time.

The post Why the National Grid share price could crush the FTSE 100 appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of National Grid. 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.

Adjusted pre-tax profit for the year rose by 24.4% to £10.8m, while adjusted earnings climbed 29.3% to 11.5p per share. Shareholders were rewarded with a 5% dividend increase, taking the payout for the year to 4.3p per share.

Today’s figures give the stock a trailing P/E of 8.8 with a dividend yield of 4.3%. That seems pretty cheap for a growing business, so is there anything we should watch out for?

A big adjustment

As a shareholder in Harvey Nash I’m quite pleased with today’s figures. But there are a few points worth noting.

The first is that the group’s adjusted figures exclude some big restructuring costs. Management closed a number of offices last year in order to cut costs in less profitable territories, at a cost of £1.8m.

If we accept the group’s definition of non-core and focus only on core activities, then pre-tax profit including one-off costs fell from £8.5m to £7.8m last year. On the same basis, diluted earnings per share fell from 8.7p to 7.8p, giving a P/E of 13.1.

As investors, I believe we need to be wary of companies whose figures are heavily adjusted. But in this case I think the underlying picture is still quite attractive. I expect this restructuring plan to improve the profitability of the group going forward.

City analysts also seem confident of further progress. Earnings are expected to rise by 14% to 13.1p per share this year, putting the stock on a forecast P/E of 7.8 with a prospective yield of 4.7%.

Although I wouldn’t chase a cyclical business like this to a high valuation, I believe the shares remain a buy at this level.

A strong recovery

Equipment rental group Speedy Hire (LSE: SDY) is another cyclical stock that’s performing well on a modest valuation. Since hitting problems in 2016, the business has been turned around and is now delivering significantly higher profits.

During the six months to 30 September, underlying sales rose by 6.9% to £183.2m. Pre-tax profit climbed 11% to £6m, while strong cash generation enabled the group to reduce net debt by 26% to £63.1m.

Analysts expect an adjusted net profit of £18.8m for the year ended 31 March 2018. Adjusted earnings are expected to rise by 53% to 3.7p, putting the stock on a forecast P/E of 14.

Growth expected to continue

This strong momentum is expected to carry on this year. Forecasts for 2018/19 suggest earnings will climb 22% to 4.6p per share, putting the stock on a modest forecast P/E of 11.5. Alongside this, the group’s improved cash generation is expected to support a dividend of 1.72p per share, giving the stock a forecast yield of 3.3%.

Like Harvey Nash, Speedy Hire is exposed to cyclical risks. A slowdown in the construction and infrastructure markets could leave the firm with too much equipment that it can’t hire out.

However, there’s no sign of this so far. And the company’s increased focus on value-added services such as testing and training could help to reduce this risk, supporting higher profit margins.

In my opinion, Speedy Hire may be too cheap to ignore at current levels.

The post 2 growth stocks I’d buy at today’s value prices appeared first on The Twelfth Magpie.

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Roland Head owns shares of Harvey Nash. 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.

SThree

£455m market cap SThree (LSE: STHR) is a leading international staffing business that provides permanent and contract specialist staff to a diverse base of over 9,000 clients. The group is a major player in the information and communications technology (ICT) sector but also has exposure to the financial services, energy, engineering and life sciences sectors.
 
For a small company that is exposed to the cyclical nature of employment, its dividend track record is fairly impressive. Since paying a maiden dividend of 7.2p per share for FY2006, the payout has grown by 94% to 14p per share, a yield of 4% at the current share price. Dividend coverage was solid last year, with earnings covering the dividend 1.8 times, and it’s worth noting that the company has never cut its payout. That’s a fantastic achievement given that global recruitment hasn’t always been strong over the last decade.
 
My only criticism of the company’s capital allocation is that it has now paid seven consecutive dividends of 14p per share. Ideally, I’d like to see more consistent increases. With inflation creeping up, 14p today has less purchasing power than 14p seven years ago.
 
A trading update released this morning revealed that the firm has solid momentum at present and that global hiring conditions are buoyant. For the three months to the end of February, gross profit rose 8% year-on-year. While hiring was understandably poor in the UK (-3%), it was strong across Continental Europe (+15%), and the Asia Pacific and Middle East regions (+15). Chief Executive Gary Elden commented that the group has “made an encouraging start to the year” and that there are “good growth opportunities” available in 2018.
 
City analysts expect full-year sales growth of 9% and 8% for 2018 and 2019 respectively, with earnings expected to climb higher too. While another dividend payout of 14p per share is pencilled in for 2018, analysts expect growth to 14.8p per share in 2019. On a forward P/E of just 12.9, SThree certainly looks to have investment potential.

Harvey Nash  

Another small-cap stock that packs a mighty dividend punch is £67m market cap Harvey Nash (LSE: HVN). Like SThree, the company is a staffing specialist, with operations both here in the UK, and internationally. The firm specialises in technology and digital recruitment, so is well placed to ride the current tech boom.
 
For FY2017, HVN paid its shareholders 4.1p per share, which at the current share price, is a healthy yield of 4.7%. Coverage was solid at 2.2 times. Dividend growth over the last five years has been excellent, with the payout increasing from 2.7p to 4.1p per share, an increase of over 50%.
 
Looking ahead, City analysts expect the dividend payout to keep rising, with distributions of 4.3p and 4.6p per share expected for FY2018 and FY2019 respectively. Trading on a forward P/E of just 6.9, this is a growth and income stock that definitely warrants a closer look.   

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Edward Sheldon owns shares in Royal Dutch Shell and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Royal Dutch Shell B. 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.

A stealthy 6% yield

AIM-listed Shoe Zone (LSE: SHOE) is a budget retailer focused on the cheap end of the shoe market.

Shares in this Leicester-based firm edged higher on Thursday, after it said sales had fallen by 1.2% to £157.8m last year due to the closure of lossmaking stores.

And although pre-tax profit fell by 7.3% to £9.5m as a result of exchange rate losses, the market seemed reassured by net cash of £11.8m and an unchanged final dividend of 6.8p. This leaves the payout for the full year at 10.2p, giving a yield of 6.3%.

Why I like this business

One of the reasons I like Shoe Zone is that its chairman and chief operating officer, Anthony and Charles Smith, own 50.01% of the shares. Although this gives them control of the company, it should also mean that their interests are aligned with those of other shareholders.

A second attraction is that almost 85% of footwear is ordered directly from overseas factories, cutting out the middleman. This boosts the firm’s margins and gives it greater control over quality and design.

Short leases mean that the group’s store portfolio is flexible and benefits from falling rental rates on lease renewals.

A final attraction is that this business has consistently generated a return on capital employed (ROCE) of more than 22% since its flotation. That’s high by any standards, and is one of the main reasons why cash generation (and dividends) are so strong.

Of course, this stock isn’t without risk. Growth rates have been very low since flotation and currency headwinds are expected to remain a problem. But these risks are already reflected in the share price, in my view.

With the shares now trading on 10 times forecast earnings and offering a 6.3% yield, I’m seriously considering buying a few for my own portfolio.

Earnings could rise by 21%

Shoe Zone’s low rating may be a result of weak growth. But no such excuse applies to technology recruitment and outsourcing group Harvey Nash Group (LSE: HVN). Analysts expect earnings at the firm to rise by an impressive 21% in 2017/18, and by a further 22% in 2018/19.

Why then does the stock trade on a 2018 forecast P/E of 8.1? One reason may be that the market is not convinced that the group’s profits will be sustainable. That’s a valid concern, given hiring headwinds in the UK, which with Ireland accounts for nearly 40% of fee income.

A second risk is that the firm’s first-half earnings were a little mixed. Although revenue rose by 9.2% to £425m, excluding exchange rate effects, underlying pre-tax profit was only 1.8% higher, at £4m. Net debt has also risen due to acquisitions.

I’m optimistic

Analysts covering the stock have upgraded their profit guidance three times over the last year. I’m prepared to trust management guidance that performance will be stronger during the second half of the year.

With the stock trading on a P/E of 8 with a prospective yield of 5%, I believe Harvey Nash could still be a rewarding buy.

The post 2 ‘secret’ small-cap dividend stocks I’d buy for 2018 appeared first on The Twelfth Magpie.

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Roland Head owns shares of Harvey Nash 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.

Game on

£300m cap, Cambridge-based business Quixant (LSE: QXT) has been a great performer over the last year with shares in the computing platform provider soaring 63%. A quick glance at September’s interim numbers gives some indication of why the stock has become so popular.

In the six months to the end of June, group revenue rose 38% to just under $57m, with roughly two-thirds of this coming from Quixant’s Gaming division. Even more impressive is the fact that the remaining £19.1m came from Densitron — the electronic screen maker only acquired by the former in 2015.

Although pre-tax profit pretty much doubled to $8.7m from the $4.4m achieved over the first half of 2016, management — rather sensibly — isn’t getting too carried away. While remaining confident on trading for the rest of the 2017 and beyond, Chief Operating Officer Jon Jayal suggested that recent strong demand for its gaming platforms was “out of the ordinary” and unlikely to continue for the full year. In a market where companies frequently over-promise and under-perform, this kind of transparency is really rather refreshing.

At 30 times forecast earnings, Quixant is most definitely not a cheap stock to acquire. Nevertheless, recent results combined with the company’s sound financial position ($1.7m in net cash, comparing favourably to the $100,000 debt on its books as it entered 2017) and consistently high returns on capital suggest it might just be worth paying out for. Or at least adding to watchlists while we await a (somewhat inevitable) pullback in the general market.

In demand

Like those already owning Quixant, holders of small-cap recruitment specialist Harvey Nash (LSE: HVN) have also enjoyed a more-than-decent 2017 so far. Priced at 63p each in January, shares in the £65m cap have since climbed 42% to just under 90p. With 28% and 22% EPS growth expected over the next two years as demand for skilled technicians continues to rise, there could be plenty of upside left to come.

Last week’s interim results for the six months to the end of July revealed a 12.6% jump in revenue and 16.8% increase in pre-tax profit despite a “challenging UK market,” according to CEO Albert Ellis. Record revenue and profits were reported from operations in the Benelux countries with improved trading also seen in the Nordics and Asia Pacific regions.

A transformation plan — implemented during the reporting period and designed to streamline the business, reduce overheads and sort out underperforming offices — was “on track” according to the company. It’s expected to deliver savings of £1.1m this year followed by a further £2.2m in 2018/19. To further support growth, the firm also moved to AIM from the main market after deeming the former to be more appropriate for its scale and acquisition strategy.

Trading at just 8 times earnings for the current year, shares in Harvey Nash look a steal at the current time — even more so when it’s considered that the stock comes with a forecast 4.8% yield, easily covered by profits. While it’s worth keeping an eye on the company’s debt burden, I remain bullish on its prospects for now.

The post These small-cap growth stocks could still make you brilliantly rich appeared first on The Twelfth Magpie.

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

AIM-listed Filta Group (LSE: FLTA) started out providing used oil filtration and fryer cleaning services. It’s since expanded and offers a range of related services to customers in the UK, US and most recently Canada.

Filta only floated on AIM in November 2016, so we don’t have much history to go on. But the company published its latest interim results on Thursday morning, sending the shares up by 9%. This sounds like a potentially interesting growth business to me, so I’ve been digging into the figures to find out more.

Sales up 39%

The group reported 12 new franchise sales for the period, taking its total number of franchisees to 182. Growth was strong in most areas of the business, and a recent acquisition will also broaden the firm’s service offering.

Filta’s headline financial figures suggest that this operational growth is translating into rising profits. Group revenues rose by 39% to £6.6m during the six months to 30 June, while the group’s underlying operating profit rose by 62% to £1m.

Filta reported earnings per share of 2.6p for the half-year period, and the board has declared an interim dividend of 0.65p per share. In my view, both of these figures are consistent with analysts’ full-year forecasts for earnings of 6p per share and a total dividend of 2p per share.

These figures give the firm’s shares a forecast P/E of 26 and a prospective yield of 1.4% for 2017. This isn’t cheap, but it could be a reasonable basis for an investment if the firm’s growth continues at current rates.

Too cheap to ignore?

One of the small-cap stocks in my personal portfolio is recruitment group Harvey Nash (LSE: HVN). This £60m firm operates in three main areas — executive search, professional recruitment and outsourcing.

The majority of the group’s profit is generated in the UK and mainland Europe, but the firm’s outsourcing operations mean that it’s also quite active in Asian markets such as Vietnam. Like other small companies in this sector, Harvey Nash was affected by last year’s Brexit vote.

The group’s results for 2016/17 suggested that market conditions were mixed, as pre-tax profit fell by 6% to £8.5m and earnings per share were 8% lower, at 8.7p. However, the group’s strong cash generation wasn’t affected, and year-end net cash rose from £0.2m to £5.6m. Shareholders were rewarded with a 7% increase to the final dividend.

Looking ahead, Harvey Nash’s latest trading update indicates that trading is in line with expectations so far. Ongoing recruitment of contractors is said to be “comfortably ahead of last year” and measures are being taken to cut overheads by around £1m per year.

Brokers’ consensus forecasts for the year have risen sharply over the last few months. Earnings are now expected to rise by 20% to 10.4p per share this year, putting the stock on an undemanding forecast P/E of 8.

The dividend is expected to be lifted 5% to 4.3p, providing an attractive and well-covered yield of 5.2%. I continue to view this stock as a buy for income and growth.

The post 2 under-the-radar small-cap stocks you probably haven’t considered appeared first on The Twelfth Magpie.

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Roland Head owns shares of Harvey Nash. 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.

A strong performance?

Reporting on Friday was recruitment company Harvey Nash (LSE: HVN). Its gross profit increased by 8% with the effects of a weaker pound factored-in. However, its underlying performance was less impressive. Its gross profit was 1% lower than in 2015, although this was in line with market expectations. Growth was held back in the UK and Ireland by Brexit uncertainty, while challenging market conditions in Hong Kong and higher costs in Vietnam meant its performance was somewhat downbeat for the year.

However, its gross profit increased by 4% in Mainland Europe on a constant currency basis. This shows that its strategy is working well overall, while a lack of debt and a strong cash position mean the company has the potential to deliver strong growth in the long run. And since sterling is likely to remain weak as Brexit negotiations begin, the company’s outlook may be relatively positive.

Growth potential

In the current year, Harvey Nash is expected to record a rise in its bottom line of 4%, followed by further growth of 9% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 0.7, which indicates that there is significant upside potential. Certainly, there is scope for more disappointment in the UK, where the recruitment industry may face difficult trading conditions as Brexit uncertainty builds. However, this may be offset to some extent by weaker sterling, as well as upbeat performance from Mainland Europe.

Sector potential

Of course, Harvey Nash is a relatively small business and so may come with higher risk than a larger recruitment company such as Hays (LSE: HAS). Both stocks could benefit from weaker sterling and their strategies appear to be sound. However, since Hays appears to have stronger finances and a more diverse business model, it is likely to have a lower risk profile than its sector peer.

Furthermore, Hays is expected to record growth in its bottom line of 9% this year and 6% next year, which is slightly higher than that of Harvey Nash. However, since the smaller of the two companies has a PEG ratio of 0.7 versus 1.8 for Hays, it could deliver higher rewards.

Therefore, less risk-averse investors may prefer to take a close look at Harvey Nash over Hays, since it seems to have higher capital gain potential. Its shares may be volatile and it may lack the financial strength and diversity of large-cap peers, but its shares seem to be fairly priced at the present time.

The post Could weak sterling help this small cap to beat the FTSE 100? appeared first on The Twelfth Magpie.

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• Forget meal deals! Here’s how £8 a day could be worth £357,000
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• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
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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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.