Problems first started to emerge last May. Management had expected the launch of the Japanese government’s My Number ID card programme to drive a significant uplift in revenues its Japanese division. But this growth failed to materialise and, as a result, Photo-Me issued a profit warning and announced that it was restructuring its Japanese business.

Further problems 

Nearly 12 months on and the company’s situation has improved slightly, although other headwinds are now starting to emerge. 

According to the company’s latest trading update, following last year’s restructuring, the Japanese business is performing strongly and so are Photo-Me’s operations in continental Europe.

But the UK market has now become the group’s problem child. According to management, trading has become more “challenging than expected” thanks to Brexit uncertainty. 

The slowdown began at the beginning of last year, and management was expecting sales to pick up in the second half. This recovery has not happened. As a result, “the group now does not expect to achieve a recovery in order levels before the end of the current financial year.“

With the slowdown expected to continue, management now believes profit for the financial year ending 30th April will now be at least £42m, below previous guidance of £44m.

Dividend confirmed 

The one piece of good news Photo-Me’s shareholders have received over the past 12 months is that the company is committed to maintaining its current dividend. At current prices, the stock yields 10% and is supported by a cash-rich balance sheet. 

Despite management’s dividend commitment, I’m no longer as confident on the outlook for the company as I used to be and I don’t think it’s worth chasing this yield. The distribution is only covered 1.1 times by earnings per share, indicating the payout could be for the chop if profits continue to slide.

On the other hand, I’m much more optimistic on the outlook for homebuilder Redrow (LSE: RDW).

Cheap income 

There is lots to like about Redrow. For a start, the stock is outrageously cheap. It’s changing hands for just 6.8 times forward earnings at the time of writing. That’s without adjusting for the group’s cash balance, which stood at £100m at the end of 2018.

Then there’s the company’s dividend yield. City analysts have pencilled in a total dividend per share of 48p for the group’s fiscal 2019, and earnings per share of 89p, implying a dividend cover of 1.9.

In total, I estimated the distribution will cost the company around £123m, which should be easily covered by free cash flow. Indeed, last year the group generated nearly £200m of free cash more, which was more than enough to cover the dividend and pay down £85m of debt at the same time. 

Now that the business is debt free, it can afford to return much more cash to investors. I think that’s exactly what management will look to do over the next few years.

The post A 10% yield I’d sell to buy this cheap FTSE 250 income stock 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?

Rupert Hargreaves owns no share mentioned. 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.

In other cases, however, there may still be scope for capital growth. Two examples are Petrofac (LSE: PFC) and Photo-Me (LSE: PHTM), which both seem to offer low valuations and the potential for improving financial performance over the long run.

Growth potential

Instant-service equipment company Photo-Me’s share price increased by as much as 13% on Wednesday following the release of a trading update. The company is performing in line with expectations, and has been able to make progress in turning around its poor performance in Japan. It’s restructured its Japanese subsidiary, with a management reorganisation completed, administrative functions streamlined, and low-revenue machines relocated. This is set to lead to a return to growth for the division next year.

The performance of the remainder of the business has been positive. It’s invested in upgraded technology in its photobooths, while continuing to expand its laundry business. The kiosk market has also been stable, and there seems to be expansion potential through an increasing focus on innovation.

Looking ahead, Photo-Me is forecast to post a rise in earnings of 11% next year. It trades on a price-to-earnings growth (PEG) ratio of 1.2, which suggests it may offer a wide margin of safety. Following improvements to its customer offering, its long-term future could improve and lead to a stronger business in future years.

Improving outlook

The Petrofac share price has risen by a third in the last year, with an improving outlook for the energy sector a key catalyst. The oil price has risen significantly, and this is likely to increase activity across the energy sector. With oil producers being much more profitable now that oil is at a higher price level, investment and demand for support services companies could increase. This could create more favourable operating conditions for Petrofac.

Clearly, it will take time for the company to deliver an improving financial performance. In the current year and next year, its bottom line is forecast to fall by over 20% in total. The stock market, though, seems to be pricing in the disappointing financial outlook for the business over the next couple of years. The company’s shares trade on a forward price-to-earnings (P/E) ratio of around 10, which indicates that there’s a margin of safety on offer.

Furthermore, Petrofac has a dividend yield of 4.8%, covered 2.4 times by profit. Should the resurgence of the wider energy sector continue, it wouldn’t be a major surprise for the company’s dividends to increase, which could provide a boost to its total return over the long run and increase its investment appeal.

The post Think the Petrofac and Photo-Me share prices are expensive after 10%+ gains? Read this now appeared first on The Twelfth Magpie.

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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 owns shares of Petrofac. 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.

The reason I like this business so much is that it has all the hallmarks of a tremendous long-term income play.

Cash cow 

For starters, the company is a cash cow. Over the past six years, the group has generated an average annual free cash flow per share of 3.6p or £13.6m. In recent years, the amount of free cash flow generated from operations has declined due to high levels of capital spending, but it looks as if the company can more than afford the additional capital outlay. 

At the end of 2018, Photo-Me had a robust cash balance of £25m. I expect this total to increase for fiscal 2019 because today the company announced that it had sold its investment in Stella Technologies SA, a Paris-based European Biotechnology company, for a total of €7m including repayment of various loans. The holding was acquired for a total consideration of €1.5m, so it looks as if the company has achieved a high return for shareholders over the holding period.

That being said, current City projections are calling for a slight decline in the firm’s per share dividend distribution this year. A full-year payout of just 8.1p is expected, down 4.2% (although the half-year distribution has already been hiked by 20%). This is disappointing as over the past five years the payout has grown at a compound annual rate of 23%. 

Still, investors can’t grumble because today the shares support a dividend yield of 6.6% and trade at a modest P/E of 12.9. In my opinion, a fair price to pay for dividend champion Photo-Me. 

With its cash-rich balance sheet and fat profit margins of more than 20%, this dividend stock looks to me to be one of the most attractive on the market.

Rebuilding the business

Another income stock I have my eye on today is Dixons Carphone (LSE: DC).

Dixons is a classic contrarian income play. The stock has come under pressure over the past 12 months as management has tried to restructure the business. The firm’s business model is built on selling mobile phones to customers on multi-year contracts on behalf of mobile providers. This business is lucrative, but it exposes the company to a great deal of credit risk. 

As the consumer environment changes, Dixons is having to change its operating model and profits are falling. For the 2018 financial year, earnings per share (EPS) declined 18%, and the City is calling for a further 22% decline this year.

However, despite the company’s bleak earnings outlook, I’m optimistic on the outlook for its dividend. The payout, which is currently 11p per share, gives a dividend yield of 6.8% and is covered 1.8 times by EPS.

And even though Dixons’ earnings are set to fall in fiscal 2019, the stock looks dirt cheap. It is currently changing hands for 7.8 times forward earnings, which I reckon gives an attractive margin of safety, especially when the rest of the UK retail industry is trading at a multiple of more than 10 times earnings.

The combination of a low valuation, as well as a market-beating dividend yield, lead me to conclude that it could be a great addition to any income portfolio.

The post Are these the market’s 2 most attractive 6%+ yielders? appeared first on The Twelfth Magpie.

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Rupert Hargreaves has 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.

If trading is improving, this glitch in performance and share-price collapse could mean that we are being presented with a decent opportunity to buy the firm’s shares at a better price. Let’s dig deeper. Maybe I should buy the glitch and pile into this 7%-yielding small-cap right now.

Money collection machines

Photo-Me operates, sells and maintains instant-service vending equipment for the consumer market. The firm has around 48,000 vending units in operation such as photobooths, integrated biometric identification solutions, unattended laundry services, kiosks for high-quality digital printing, children’s rides, amusement machines and business service equipment. 

The firm’s tactics lead to most of the equipment being placed in prime locations that have high footfall such as supermarkets, shopping malls and public transport venues. The business model involves paying site owners commission based on the machines’ turnover and Photo-Me operates and maintains the equipment. Operations span 18 countries across continental Europe, the UK, Ireland, Asia and the rest of the world.

Trouble in Japan and emerging fast growth

The trading update released at the end of May — which did the damage to the share price — told us that extra investment in the Japanese subsidiary, due to restructuring, had led to a reduced outlook for profits for the trading year to 30 April 2019. Trading in Japan has been disappointing due to fierce competition and slower-than-expected take-up of a voluntary government ID card programme. All this led the directors to anticipate that underlying profit before tax would likely come in at a similar level as the year to April 2018, which the firm reported on today. That’s an outcome that falls below previous market expectations.

However, today’s figures are good, with revenue at constant currency rates almost 6% higher than the previous year and diluted earnings per share up more than 14%. The directors pushed up the full-year dividend by 20%, which I see as a big vote of confidence in the outlook. I think the firm is optimistic that its reorganisation in the Japanese division will pay off down the road. Meanwhile, all the other divisions and geographies are trading well and the firm said it is experiencing “continued revenue growth in all of Photo-Me’s territories, apart from Japan.”

16% of revenue came from the higher-margin laundry business. I think that’s exciting because the revenue from the laundry division grew a whopping 69% in the period. Chief executive Serge Crasnianski said in the report that he expects revenue from Laundry to contribute an “increasingly dominant share to Group profits as we capitalise on the significant expansion opportunities in our markets.”  I think Photo-Me’s modest two-digit forward price-to-earnings rating, and a forward dividend yield in excess of 7%, make the stock well worth your time researching the investment opportunity further.

The post Should I buy the glitch and pile into this 7%-yielding small-cap? 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?

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Photo-Me International. 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.

Even though the company achieved underlying operating profits of £48.5m in the first half of the year, it struggled to break even in the second half of 2017. When the results for the full year were eventually released, it reported a decline in earnings per share for the year of 4.2%.

Unfortunately, analysts are expecting earnings to decline a further 14% this year, but growth is expected to return in 2019 thanks to the company’s efforts to rebuild the business around used vehicle sales, automotive after-sales services and software. 

Software sales 

Pendragon’s Pinewood Technologies is a leading software provider in the motor industry, providing dealer management software for dealerships all over the world. Even though this division is relatively small compared to the overall group, it generates a disproportionate amount of profit and is still growing steadily. Software sales accounted for less than 0.4% of revenue in 2017 but 13% of operating profit. 

That being said, even though software sales will pick up some of the slack, there’s no getting away from the fact that the firm’s income is set to fall in 2018. Still, even with earnings due to come in 14% lower, City analysts believe the group’s dividend of 1.55p per share will continue to be covered twice by earnings per share. 

Management is also trying to sell Pendragon’s US dealerships, which could fetch £100m, wiping out almost all of the company’s debt.

These figures lead me to believe that the firm’s dividend yield of 6.2% is not going to be slashed anytime soon and the stock is a steal, changing hands at just seven times forward earnings.

A great opportunity 

Another income stock that I believe is too cheap to pass up right now is Photo-Me (LSE: PHTM). 

Last month, shares in Photo-Me slumped after the company issued a profit warning thanks to slower than expected growth in one of its most important photo booth markets, Japan.

Part of the reason why the shares fell so heavily after its warning is that they looked quite expensive heading into the update. After years of explosive growth (net profit has more than doubled over the past five years), investors were expecting the good times to continue. The market was not expecting a profit warning. 

However, even though City analysts now expect to the company’s earnings per share to remain stagnant for the next two years, I believe this is an excellent opportunity for investors to snap up a high-yield share at a bargain price.

Indeed, right now shares in Photo-Me support a dividend yield of 7.1% and trade at a forward P/E of 12.6, the lowest valuation awarded to the stock since 2013. Management has already stated its commitment to the dividend following the profit warning, and with net cash of approximately £26m at the end of April, it really does look as if this market-beating dividend yield is here to stay.

The post Are these two small-caps the cheapest high yield stocks around? 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?

Rupert Hargreaves owns shares in Pendragon. The Motley Fool UK has recommended Pendragon and Photo-Me International. 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.

Management is undertaking a restructuring of the group’s Japanese photobooth business. This division is currently performing below expectations thanks to a surge in competition following the launch of the Japanese government’s My Number ID card programme.

However, according to Photo-Me’s update, “this card programme is not compulsory and has not gained the momentum photobooth operators initially anticipated.” So the company is now reconsidering its position in the Japanese market and looking to “invest in a thorough restructuring of its Japanese subsidiary.” Restructuring will weigh on profits while under way, but it is “expected to boost profitability in FY19 and beyond.“

After factoring in these costs, management believes that profit before tax for the year ending 30 April 2019 will be at least £44m, which is “likely to be at a similar level to [the] financial year ended 30 April 2018.” 

Time to buy? 

Photo-Me’s growth stumble is disappointing, but I believe that despite this setback, the stock remains an attractive income play for investors. 

After today’s decline, the shares support a dividend yield of just under 6% and this morning’s trading update notes, “although no final decision has yet been made, the board currently expects that it will maintain the group’s existing dividend policy.” So it looks as if the payout is here to stay. With net cash of “approximately £26m” at the end of April, Photo-Me certainly looks to have the resources to maintain the dividend at its current level. 

And when the company does return to growth, I expect it to return to its dividend growing ways. 

Over the past six years, it has increased its dividend at an average rate of 23% per annum, from 2.5p to an estimated 8.4p for 2018. With this being the case, I believe today’s declines could be a great opportunity to snap up shares in the dividend growth champion. 

Strong and flexible 

With its “strong and flexible” business model, IRN-BRU maker A.G. Barr (LSE: BAG) is also on my dividend growth stock radar. 

What I like about A.G. Barr is the group’s defensive business model and its strong cash generation. For fiscal 2018, net cash jumped 50% to £15m even though the firm spent £17m on dividends and £8.5m buying back stock during the year. I expect the soft drinks manufacturer to report a similar performance for fiscal 2019, generating more cash to support the dividend and underpin dividend growth. Indeed, as my Foolish colleague Kevin Godbold recently pointed out, it looks as if there’s nothing visible on the horizon to suggest that dividend growth will falter.

The one downside is that shares in A.G. Barr are relatively expensive. At the time of writing the stock trades at a forward P/E of 20.8 and the dividend yield is a lowly 2.4%. That being said, in my view, this is a price worth paying for one of the most defensive stocks on the market today. 

The post Why I’d buy and hold shares in this dividend growth stock forever appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended AG Barr and Photo-Me International. 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.

With the end of the current tax year just around the corner, time is running out for investors to take advantage of their annual £20,000 ISA allowance. Fail to use it by April 5 and it’s gone forever.

For those seeking income from their investments, however, there’s another big reason to get things sorted. Thanks to the forthcoming cut to the dividend allowance (from £5,000 to £2,000), it’s now more important than ever to shelter big payers within these tax-efficient accounts.

With those investors in mind, here are three companies that I think look decent picks at the current time.

Grab those dividends

Harry Potter publisher Bloomsbury‘s (LSE: BMY) share price may have been somewhat erratic over the last year — bouncing around between 160p and 180p — but recent trading suggests that its ability to pay decent dividends isn’t in danger.

Last week’s update for the year to the end of February revealed that profits would be “well ahead” of management expectations as a result of “excellent sales” and “lower than anticipated returns“. At around £25m, the company’s net cash position is also likely to be “significantly ahead” of that predicted.

Shares in the small-cap come with a forecast 4% yield based on current earnings estimates for the next year. The fact that increases in the total payout have been remarkably consistent over the years at around 4%-5% is also worth highlighting.

All this for a forecast 14 times earnings. That looks a pretty good deal to me.

Next on my list of top picks for dividend investors would be £700m cap fantasy figure maker Games Workshop (LSE: GAW) — a company whose share price has climbed almost 350% in just two years, making it one of the best performers in the main market.

February’s (extremely brief) trading update was positive with the Nottingham-based business stating that recent growth trends had continued to the end of January. As a result, sales and profits for the current year to date were “slightly above expectations“. 

Even if owners are unlikely to see share price gains similar to those experienced in recent years, Games Workshop boasts excellent free cash flow, a robust balance sheet, repeatedly high returns on the capital it invests and great operating margins. A valuation of 13 times earnings still doesn’t feel excessive, particularly given the 5.3% yield on offer.

Mid-cap instant service equipment provider Photo-Me International (LSE: PHTM) may not grab many headlines but it looks another solid option for dividend hunters.

December’s interim results were decent enough with revenue up 7.8% (to £122.2) at constant currency. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 7.9% to just under £45m as the company revealed “continual strong performance” in its various operations. Particularly noteworthy was the 75% rise in total revenues at its laundry business, going some way to explaining why this is now seen as a “primary growth driver” for the Bookham-based firm. 

Although net cash levels fell due to ongoing investment and — positively — higher payouts to shareholders, Photo-Me still had £47.1m at the end of the six months.

Perhaps the most important news for income investors, however, was the 20.1% hike to the interim payout. Based on current estimates, it looks likely that the stock will yield just under 5% in the current financial year. With the best instant access cash ISA offering a paltry 1.3%, I know where I’d rather put my money.

The post 3 top dividend stocks to consider before the ISA deadline 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.

Strong position

In this space, I reckon Communisis (LSE: CMS), the small-cap marketing company, could be one of the best dividend stocks to buy right now.

Amid a changing market landscape, the company has successfully transformed itself from an old-fashioned printing business into an integrated marketing specialist with fast-growing digital capabilities.

It has put itself in a strong position to take advantage of the shift from print towards digital services and has continued to win new contracts, which has been translating into healthy earnings growth and exciting further growth prospects.

The company has also recently announced an ambitious three-year Value Enhancement Programme to deliver 5%-10% annualised adjusted EPS growth through to 2020, via its three key strategic themes: Digital First, Global Reach and Empowered Organisation.

Low valuations

Despite its attractive outlook on growth, the valuation multiples for the company seem undemanding. As City analysts are expecting underlying earnings growth of 6% this year, its shares trade at just 9.5 times its expected earnings. And looking further ahead, analysts have pencilled in a further 7% growth in its bottom line, which would reduce its 2019 forecast P/E to a mere 8.8 times.

Dividends per share are also forecast to rise impressively, from 2.66p last year, to 2.84p and 3.02p for 2018 and 2019, respectively. This means its prospective yield is set to rise from 4.1% currently, to 4.4% and 4.7%, respectively. Moreover, its dividend safety is attractive, with dividend cover forecast to be around 2.4 times over the next two years.

Free cash flow

Elsewhere, Photo-Me International (LSE: PHTM), a small cap company which operates a wide range of instant service equipment, offers prospective investors a dividend yield of 4.9% that is supported by steady earnings growth.

With a forward P/E of 17.8, valuations seem pricey for the company. But this is offset by its strong free cash flow generation, which allows it to return a relatively high proportion of its earnings — more than 70% in the last financial year — to shareholders via dividends.

Future growth

As a leading global operator of self-service photobooths, Photo-Me benefits from robust geographical diversification which shields it from a slowdown in any one particular market. As such, despite a slowdown in the UK and Japan, revenue growth keeps chugging along steadily as rises in continental Europe and Ireland offset the slack.

The company is also doing well in its expanding self-service laundry business. Photo-Me added more than 700 self-service laundry units in the first half of the year, which should help the company deliver continued earnings hikes going forward.

City analysts are sanguine. Out of three brokers covering the stock, all three rate it as either a ‘strong buy’ or a ‘buy’.

The post This small-cap could be one of the best dividend stocks to buy now appeared first on The Twelfth Magpie.

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Jack Tang 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.

Industrial turnaround specialist Melrose is currently fighting for control of GKN (LSE: GKN), which has been floundering for the past few years. Indeed, prior to the takeover approach, shares in GKN had lost 11% over the four years since 2014 excluding dividends.

However, GKN’s management believes that Melrose’s offer deeply undervalues the business and has accused the acquirer of trying to buy the group with its own money. The £7.4bn offer (equivalent to 405p per share) will be funded 20% in cash with the remainder in stock. 

Restructuring to unlock cash 

To try and convince shareholders that remaining independent is the better offer, today GKN announced a capital return plan that will see up to £2.5bn (around 36% of its current market value) returned to investors over the next three years. Most of this cash return will be funded by the sale of the group’s metallurgy division, the company’s highest margin unit, which management expects to dispose of within 12 to 18 months.

The industrial group is also planning to increase its dividend policy with a target of returning 50% of free cash flow to investors from 2018 to 2020. Restructuring and streamlining efforts are expected to deliver £340m in annual cash benefits from the end of 2020. Still, despite this promise to return a hefty slug of cash to investors, I believe that investors should sell GKN following recent gains.

Melrose has a history of successfully buying, improving and selling industrial businesses, producing annual returns for shareholders of 26% since its founding in 2003. GKN, on the other hand, has struggled to create value even though it has invested £3.2bn in acquisitions over the past few years. 

History suggests that an acquisition by Melrose would be the better option for GKN investors but opposition to the deal is building on all fronts. A merger has been called a “national security risk” by an American congressman as well as the country’s largest union. Meanwhile, here in the UK Labour and the Liberal Democrats have called for the takeover to be blocked. 

Dividend champion 

Considering the above, I would sell GKN in favour of dividend champion Photo-Me International (LSE: PHTM). 

Like Melrose, Photo-Me has shown that it can create value for investors over the long term. Over the past decade, the stock has produced a total return of 21.5% per annum for investors through a combination of dividends and steady earnings growth. 

At the time of writing, shares in the photo booth and washing machines business trade at a forward P/E of 16.6 and support a dividend yield of 5.2%. The payout is only covered 1.2 times by earnings per share but it is also backed up by £49m of cash on the balance sheet, enough to sustain the distribution for a year-and-a-half if earnings collapse. This cash balance is worth around 13p per share, giving a cash-adjusted forward P/E for the business of 16.4. That’s hardly cheap but this valuation is acceptable considering the stability of Photo-Me’s earnings and the firm’s historic shareholder returns. 

The post Why I’d sell GKN plc and buy this 5.2% dividend yielder instead appeared first on The Twelfth Magpie.

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• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of GKN and Melrose. 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 gems like these are worth hunting out, as they can help to transform your portfolio into a serious winner. Today I’m looking at two stocks which could fit the bill.

Picture-perfect results

Sales at “instant service equipment group” Photo-Me International (LSE: PHTM) rose by 10.5% to £122.2m during the six months to 31 October.

This company is best known for providing automated photo kiosks for passport photos and picture printing, but it is also expanding into the self-service laundry business. Such facilities are far more popular and widespread in continental Europe than they are in the UK.

Profits from these three lines of business helped lift the group’s pre-tax profits by 6.1% to £32.9m during the first half. Earnings rose by 9.6% to 6.4p per share for the period. Most of the growth came from laundry, where sales rose by 75% during the period.

Although the rate of profit growth may not seem all that impressive, it’s worth remembering that Photo-Me’s earnings per share have risen by an average of 19% per year since 2012. The group’s dividend has risen by an average of 23% per year over the same period.

The group ended the first half with net cash of £47.1m, maintaining an unbroken record of net cash stretching back to at least 2012. Despite spending £68.6m on dividends and growth investments over the last year, net cash has only fallen by £21m during that time.

Quality worth paying for

In my view, this FTSE 250 company’s high profit margins and strong cash generation are worth paying for. Although the group’s shares trade on a 2017/18 forecast of 19, they still offer an attractive prospective yield of 4.5%.

I believe this stock continues to deserve a buy rating. It’s certainly a share I’d consider owning.

This firm is cleaning up

Biffa (LSE: BIFF) describes itself as an integrated waste management company. Collecting and handling a wide range of waste helped it generate revenue of £481.6m during the first half of the group’s financial year. That’s a 7.8% increase on the same period last year.

Underlying operating profits from the business rose by 9.3% to £43.4m over the same period. Yet although these figures seem strong, shares in the firm have actually fallen slightly since these results were published.

One reason for this might be that the group’s debt levels are now quite high, in my view. Biffa reported net debt of £272.2m at the end of the first half. Although this was broadly unchanged from the same time last year, it represents a multiple of 1.9 times times the group’s underlying earnings before interest, tax, depreciation and amortisation (EBITDA).

However, much of the firm’s debt has been accumulated through a series of acquisitions. Excluding these, the firm’s cash flow does appear strong enough to support its dividend, interest and lease payments.

Long-term opportunity?

Waste management is a sector where there are still a number of smaller firms which might be suitable for consolidation. As one of the larger players in this area, Biffa could grow steadily by acting as a consolidator.

Given this, I think that the group’s forecast P/E of 13 and 2.9% yield could be a good starting point for a long-term position.

The post 2 dividend-growth stocks that could make you a millionaire appeared first on The Twelfth Magpie.

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Roland Head 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.