Take independent construction materials company Breedon (LSE: BREE) for example. Over the past 10 years, Breedon has produced an annualised return of 17% for investors, turning a simple £1,000 investment a decade ago into £5,500 today.

I see no reason why this trend can’t continue. Breedon is the largest single operator of aggregate mines and quarries in the UK, which means it is uniquely positioned to supply the country’s construction market — competitors can’t just start up a new quarry overnight. Management is using cash flow from the company’s established operations to expand into new markets, such as Ireland, and build out the firm’s presence here in the UK where it’s underrepresented.

Investing in growth 

The strategy is paying off. According to a trading update issued by the company today and after acquiring Lagan Group last year (one of its most significant acquisitions to date, taking it into the Republic of Ireland), revenues for the 10 months to the end of October exploded 32%, thanks also to increases in aggregate and asphalt volumes of 21% and 45%, respectively.

Going forward, management expects demand for construction materials in the Republic of Ireland to continue to grow at a double-digit rate, offsetting the weakness in the UK.

Right now, shares in this one-of-a-kind business are changing hands for just 13.6 times forward earnings, a multiple, which in my opinion, doesn’t do the company justice. 

Considering its unique position in the market, and record of earnings growth (net profit has grown at a rate of 60% per annum for the past five years), I would be willing to pay a high teens multiple to get my hands on the stock today. Management seems to agree. The group’s CEO, managing director, and several executive directors all recently splashed out to buy shares in the business. I think it could be worth following them.

Cash returns 

Like Breedon, Somero Enterprises (LSE: SOM) also has an impressive track record when it comes to shareholder returns. Over the past 10 years, shares in the company have returned 40.2% per annum for investors, turning every £1,000 invested into £52,000.

Can this trend continue? I believe it can. Somero is a world leader in the production of laser-guided construction equipment, and demand for its products is only growing. But what I really like about this firm is that it’s highly profitable. Last year, is reported an operating profit margin of 29.7%, and a return on capital employed — a measure of profit for every £1 invested in the business — of 55%.

Management is returning a significant amount of profit generated from manufacturing and selling the laser-guided equipment to investors. The shares currently support a dividend yield of 6.5%, and there’s just under £21m of net cash on the balance sheet. 

Considering all of the above, and with analysts expecting earnings to increase by 17% this year, I believe Somero’s valuation of 10.3 times forward earnings significantly undervalues the business, and its prospects.

The post Why I’d invest £2,000 in this stock with millionaire-maker potential appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.

Follow the money

Manufacturer of laser-guided construction equipment Somero Enterprises (LSE: SOM) is an excellent example of the rule that boring businesses tend to make the best investments.

Over the past six years, its net profit has expanded at a rate of around 80% per annum! Thanks to this growth, shares in the company have more than quadrupled in value since mid-2013. 

City analysts believe the group’s growth will slow over the next two years. Analysts have pencilled in an earnings per share (EPS) increase of just 17% for 2018 and 5% for 2019, a significant drop on the 80% per annum recorded between 2012 and 2017. Still, what Somero lacks in earnings growth, it more than makes up for in dividend potential. 

The shares currently yield 3.9%, but this is expected to hit 5.5% by 2019. According to analysts, Somero’s per share payout will jump 42% by 2019. With $20m of net cash on the balance sheet, and dividend cover of 2 times (for 2017) it can easily afford this growth. And I believe it could be just the start of the company’s life as an income champion because its operating profit margin of 30% gives the firm plenty of free cash flow to play with every year. Even as growth slows, management can afford to hand more cash to shareholders. 

As well as its dividend profile, shares in Somero currently trade at an attractive forward P/E of 12.5. So if you’re looking for a small-cap dividend growth play, in my opinion, this company is certainly worth a deeper look.  

Market consolidator

Another company that looks to have all the makings of a future dividend star is financial services firm AFH Financial (LSE: AFHP). 

AFH is still in its early growth stages. For 2018, City analysts are forecasting EPS growth of 87%. An increase of 15% is projected for 2019. However, at this point, I believe the figures for 2019 are conservative because AFH is complementing its organic growth with acquisitions, consolidating the highly fragmented market of small wealth managers. 

Over the past seven days, it has snapped up the client portfolios of HTH Group Limited, for £5.1m (dependent upon performance) and Harvey Curtis LLP for £2.6m. Both of these acquisitions are being funded from the group’s cash resources (£24m at the end of April). 

As AFH continues to roll up smaller wealth managers, earnings should continue to multiply, building the foundations for dividend growth. 

Today, shares in the firm only yield 1.5%, which isn’t that attractive in itself. However, the payout is covered four times by EPS, so there’s enormous scope for dividend rises. I reckon now could be the time to buy into this dividend growth story, before the rest of the market realises AFH’s full potential. 

The post These 2 small-caps could become dividend champions appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
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• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

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

Today, I’m taking a look at two small-caps that have both smashed the market over the past few years and look set to continue this record.

Profits surge

Since mid-2014, shares in construction equipment group Somero Enterprises (LSE: SOM) have produced a return of 525% for investors, excluding dividends. This means the stock has beaten the FTSE 250 by a staggering 470% over the same period. 

Surging profit is the reason why the company has been able to produce such impressive gains for investors. Since 2012, net profit has jumped a staggering 1,740% from $1m to $18m, a rate of around 80% per annum according to my figures. 

Unfortunately, growth is expected to cool this year. Analysts have pencilled in earnings growth of 14% for the year ending 31 December. Still, in my opinion, the shares continue to offer value for investors. 

The stock trades at a forward P/E of 14.4 that’s excluding cash on the balance sheet of $19m (£14m). Cash generation is one of Somero’s best qualities. Despite $14m of dividend payments in 2017, its cash balance only declined $1m for the year, as inflows easily covered shareholder distributions. 

Somero’s cash balance is worth around 24p per share according to my figures, indicating that the stock is trading at a cash-adjusted P/E of 13.7. The shares currently yield 3.6%. 

As the company continues to churn out cash, I believe its growth is only just getting started. 

Reach for the stars 

Filtration products specialist Porvair (LSE: PRV) has doubled earnings per share in the past six years as it has consolidated its leading position in the global filtration market. 

While the company’s growth hasn’t been as robust as Somero’s, I still believe it is a growth stock to watch. 

Today, the group reported that it is set to report a profits rise for the six months ended 31 May 2018 “in line with management expectations,” although there’s no further guidance on the bottom line. City analysts have pencilled in earnings growth for the full-year of 3%, which, in my opinion, seems conservative.

Indeed, today the company reported that underlying revenue growth for the period to the end of May was 13%, that’s compared to the City’s full-year target of 6%. 

Personally, I believe that Porvair could be on track to beat the City’s predictions for the year if it continues on its current course. For this reason, I also believe the firm’s current valuation of 25 times forward earnings, does not accurately reflect its potential. 

Along with Porvair’s growth track record, the shares also support a dividend yield of 0.9%. The payout has grown at an average annual rate of 10% for the past five years and is backed up by £2m of net cash on the balance sheet. 

So overall, even though Porvair might look expensive, I firmly believe the company’s potential is understated. 

The post 2 dividend-paying small caps with market-beating growth potential appeared first on The Twelfth Magpie.

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

However, some investors may see this as a contrarian opportunity to buy into weakness. Certainly, the escalating trade tensions and political instability should be taken seriously, but the sell-off in emerging markets may have been overdone. Some analysts reckon valuations have already adjusted sufficiently to compensate for the increased risks, while the longer-term outlook for emerging markets remains fundamentally attractive.

Discount to NAV

What’s more, there are a number of emerging market-focused investment trusts which continue to trade at a significant discount to their net asset values (NAVs), giving investors the opportunity to pick up shares in such funds for a price which is significantly below the value of their underlying investments.

One fund with a particularly wide discount to its NAV is the Templeton Emerging Markets Investment Trust (LSE: TEM). With a discount of just over 15%, the fund is trading at its widest discount to its NAV for nearly two years.

Aside from the recent sell-off in emerging markets, another cause for its widening discount may be the recent change in its fund manager. Veteran fund manager Mark Mobius, who had been at the helm of the fund for 26 years, retired earlier this year, and was replaced by Chetan Sehgal.

Consumer bias

In terms of allocation, the fund tilts towards countries such as China, South Korea, Brazil and Russia. Sector-wise, the trust is noticeably overweight towards consumer discretionary stocks, which account for 19.3% of its total assets, compared to just 9.5% of the benchmark MSCI Emerging Markets Index.

The consumer discretionary sector has been a persistent favourite for the fund, and is an area which seems best placed to benefit from domestic consumption growth in emerging markets. The consumption theme goes beyond goods and also include services, which are coming to represent a greater proportion of the emerging market economy. Demonstrating this, it has substantial exposure to the Chinese IT sector, via stakes in Naspers (6.1%), Alibaba (4.4%) and Tencent (3.2%).

Frontier markets

Despite the recent rout in emerging markets, frontier-markets funds have remained popular. Such funds invest in smaller countries which are at an earlier stage of economic or political development than many larger emerging markets. 

Frontier-markets funds haven’t quite entered into the mainstream, and there aren’t very many of them of them on the market — with a demand-supply imbalance, many investment trusts in this space trade at a modest premium.

One such fund is the BlackRock Frontiers Investment Trust (LSE: BRFI), which currently trades at a 4% premium to its NAV. Launched only back in 2010, the fund has realised impressive returns during its short life. Over the past five years, shares in the trust have delivered a cumulative return of 72% — nearly double the performance of its benchmark MSCI Frontier Markets Index, which gained only 39%.

Its most recent performance has been less remarkable, however. Shares in the fund are down 6% year-to-date, following a sell-off in Argentina, its biggest country exposure, and a general shift in sentiment away from riskier assets.

The post 2 investment trusts for emerging market investors 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?

Jack Tang 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.