This profitable small cap is succeeding in a very tough market.
Although mega-cap blue-chip companies like HSBC (LSE: HSBA), Vodafone (LSE: VOD) and SSE (LSE: SSE) provide the safest and most reliable way to generate a decent dividend income, it can be more rewarding for keen investors to seek out smaller, less obvious companies -- some of which offer outstanding yields and a solid, profitable history.
Profitable parcels
UK Mail (LSE: UKM) is one such company. Formerly known as Business Post, it was founded in 1971 by Peter Kane, who is still the company's chairman and who has a 12% stake in the business. It has two main lines of business -- mail and parcels -- and also operates same-day courier and palletised services.
This is not an easy market to succeed in, as Rentokil (LSE: RTO) has demonstrated with its miserable failure to generate profits from Initial City Link. However, UK Mail is a completely different story and demonstrates how such businesses should be run.
Respectable results
UK Mail's full-year results were published today, and they paint a picture of a stable, profitable business that is constantly adapting and innovating to stay ahead of the game.
Group revenues rose by 8.4% to £429m (2011: £395.8m), although once the impact of last May's Royal Mail price increases is stripped out, the underlying revenue increase was 3.2%. Operating profit came in at £15.1m (2011: £16.1m), reflecting margin pressures and the impact of last year containing one fewer working day than the previous year.
UK Mail also closed some of its depots last year as part of a cost-cutting plan, resulting in exceptional costs of £2.2m and taking profit before tax down to £12.9m.
Despite this, net cash rose to £18.4m (2011: £17.4m), while long and short-term borrowings total just £3.2m, despite capital expenditure of £6.5m in 2011.
Delicious dividends
UK Mail's lack of debt and strong net cash means it can afford to maintain a generous dividend policy.
This year's 18.2p total dividend accounts for 90% of underlying earnings per share (20.1p) and provides a 7.6% yield at the current share price of 239p.
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Intelligent innovation
Although all of UK Mail's business units were profitable last year, profits did fall in both the mail and parcels businesses. A weak economic environment, tough competition and regulatory pricing pressure on mail margins were to blame, but the company is fighting back with heavy investment in IT and new service offerings.
UK Mail now offers a web-to-print mail fulfilment service for business mail customers, which means that mass mailings can be submitted electronically and UK Mail will print, address and deliver them.
In parcels, UK Mail's focus is on the top end of the parcel market, providing next-day deliveries, timed slots and an advanced internet platform for customers to use when arranging collections and deliveries.
These are attractive services for big retailers, and UK Mail has also launched a parcel shipping website for small retailers -- SMEs and individuals -- enabling them to access competitive pricing despite low volumes. This is a sensible move given how much parcel business is driven by eBay and Amazon Marketplace.
Adding automation
Value-added services like these, which can be highly automated, should help maintain profitability for UK Mail, as will its relentless focus on efficiency and automation throughout its mail and parcels business.
I believe that UK Mail's prospects are solid and that its dividend is safe. Barring a major economic downturn (which could happen), I expect to see a slight price gain this year that should reduce the yield to more normal levels.
If you are looking for an interesting British small cap, with a long, profitable trading history, then you could do a lot worse than consider UK Mail -- I certainly am.
Finally, let me finish by adding that more income ideas can be found within this Motley Fool report: "8 Shares Held By Britain's Super Investor". The guide reviews the investing approach and portfolio of City dividend legend Neil Woodford and is free to download today.
Further investment opportunities:
> Roland owns shares in HSBC and Vodafone but does not own any of the other shares mentioned in this article.
