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Is this the ultimate small-cap dividend stock?

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Dividend yields of 4% are usually associated with blue-chip FTSE 100 companies. However, it’s not impossible to find smaller companies that have yields of this magnitude and one such company that has caught my eye recently is small-cap dividend powerhouse Bloomsbury Publishing (LSE: BMY). For a tiny company with a market capitalisation of just £125m, Bloomsbury really packs a punch as a dividend stock.  

More than a one-trick pony

While it isn’t a household name, its best selling property, Harry Potter, certainly is. And although the JK Rowling books have contributed significantly to revenues in recent years, the company is more than a one-trick pony. It has four key divisions: academic & professional, content, adult publishing, and children’s publishing. The broad spread of content, together with an increased focus on digital publishing, has enabled the company to grow revenues significantly in recent years and as a result, investors have been rewarded with very healthy dividend payouts.

Fantastic yield

For a small company, Bloomsbury’s yield is impressive. Indeed, for FY2016 the publisher paid out a total of 6.4p per share in dividends to its shareholders, equating to a trailing dividend yield of 3.9% at the current share price. That’s a higher yield than many FTSE 100 companies.

Furthermore, the company also has a magnificent dividend growth track record, increasing its dividend every year over the last five years, at a compound annual growth rate (CAGR) of a healthy 8.3%. The growth is showing no signs of slowing down either, with City analysts forecasting payouts of 6.7p and 7p for the next two financial years,

Strong dividend coverage

In addition, what makes Bloomsbury’s payout even more impressive, is the dividend coverage ratio. Dividend coverage refers to the ability of a company to pay a dividend out of the profit attributable to shareholders, and its calculated by dividing net income by the total dividends paid out. Analysts generally like to see a coverage level of 1.5 or higher to indicate that a company’s dividend isn’t at risk of being cut. In Bloomsbury’s case, coverage currently stands at 2.4, a level many FTSE 100 companies would envy.

Strong financials, attractive valuation

Looking past the dividend, Bloomsbury looks financially fit, with revenues growing 26% over the last three years and very little debt on the company’s books. At the current share price of 165p, Bloomsbury trades on an undemanding P/E ratio of just 10.8, which seems low for a business with a strong track record of generating shareholder wealth.

Sell side analysts covering Bloomsbury believe the stock is currently undervalued, with analysts at Numis, Peel Hunt and Investec placing price targets of 195p, 200p, and 197p on the stock respectively. This suggests that investors buying now may not only enjoy a sizeable dividend yield going forward, but that capital growth could be on the cards too.

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Edward Sheldon 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.