Some higher-risk ideas for brave AIM investors.
Last week, I trawled through the Alternative Investment Market (AIM) to pinpoint small companies that might stand an excellent chance of delivering outstanding gains to higher-risk investors.
My trawl was based on dividend yields, which, of course, are never guaranteed. A company that paid a dividend last year may have subsequently reported duff trading, resulting in a depressed share price and an apparently high income. In my experience, it is a mistake to expect a company that's suffering will always sustain its payout. What's more, the City's dividend forecasts might not have been updated to reflect the bad news.
In putting this list together, I've tried to weed out the companies whose high dividends looked under threat, though I may well have excluded some future winners. Furthermore, some companies listed below may fail to pay out and their shares could then tumble. These 'stock screens' should always be treated as a place to begin your research.
Anyway, here are the 10 companies I found:
Looking through the list, GVC, Randall & Quilter and Nationwide Accident Repair Services catch my eye.
GVC, in particular, is forecast to pay a dividend the year after next that makes even its current 12.5% yield look like small change. GVC has paid large dividends during the last five years, so this isn't a 'jam tomorrow' stock, but an established business with all the attributes to reward its investors in the best way: cold, hard cash.
The trouble is, a lot of GVC's revenue is at risk; the company runs some gambling websites aimed at customers in countries where online gambling is either a grey area or illegal. You should be cautious against assuming the firm's high dividends will go on forever, and clearly the market has serious doubts whether the payout can be sustained in the long term.
Still, GVC has, as I say, managed to pay consistently high dividends for the last five years, and the company has a stated policy of paying 75% of its net operating cash flow to investors. Forecasts for the 2012 dividend are as high as 37p per share, meaning a potentially massive 27% yield at the recent share price.
Randall & Quilter is another firm that pays out a large amount of its profits as a dividend. The company has the sort of record I always look for in a high-yield play: a proven history of making profits and growing shareholder dividends. The company has raised its dividend in each of the last three years in line with its explicit progressive dividend policy, and I expect at least a further two years of dividend (and profit) growth.
Randall & Quilter has matured from a business almost entirely focused on managing 'run-off risk' (charging a fee to take on the risk of legacy insurance contracts) to a diversified provider of insurance services. The 'run-off' business now accounts for around one quarter of group revenue, with the lion's share coming from outsourced services to other insurers. It is that kind of reliable income that helps convince me the big dividend payout can be maintained.
Aside from the yield, I feel the main attraction to vehicle repairer Nationwide Accident Repair Services is the company's successful track record and debt-free balance sheet. Pre-tax profits almost trebled between 2005 and 2010, although a recent trading statement did point to a downturn in 2011 as fewer cars crashed in one of the warmest winters on record. Nonetheless, management has promised the dividend will be held and announced the completion of a cost-cutting programme. To me at least, the firm looks well positioned for any upturn in its markets.
Among the others on my list, I reckon a look at Public Service Property Investments (PSPI) and ACM Shipping could be worthwhile.
PSPI is now paying a dividend three times the rate it was in 2007, and future payouts look well covered by forecast profits. The group's latest results reported a net asset value (mostly care home properties across Europe) of more than twice the recent share price. An announcement from PSPI just before Christmas suggests the directors are working on a corporate strategy to narrow this gap, and I imagine the sale of the company is now a distinct possibility.
ACM Shipping is an independent shipping broker that's likely to be affected by the ups and downs of global trading. I'm encouraged by the fact that dividends here have doubled since 2008 and forecast profits are 50% greater than the forecast dividend -- so, provided those profits are made, the dividends should flow.
What next?
As I say, these 'stock screens' should always be treated as a place to begin your research. But I think there are some interesting small caps here that could deliver handsome gains to investors prepared to accept greater risks in their portfolios. I'm still evaluating these 10 names, and would appreciate any further insight on the companies. You can post your thoughts in the comment box, below.
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More on small-cap AIM shares:
