These two small-cap stocks yield over 4% and offer solid dividend growth potential.
Deeply undervalued
Shares in automotive retailer Pendragon (LSE: PDG) have not had an easy run of late. Since the start of the year, the value of the company’s shares have fallen by 35% on concerns over a potential slowdown in new car sales following the Brexit vote.
However, despite the economic uncertainty created by the June referendum outcome, consumer confidence has held up more resiliently than many economists had previously expected. Likewise, Pendragon’s revenue growth defied earlier expectations. The group’s sales grew 5.7% on a like-for-like basis in the third quarter of 2016, despite a strong comparator last year, while underlying pre-tax profit increased by 6.3%.
City analysts expects Pendragon will deliver earnings growth of 6% for the full-year 2016, with a further 5% growth pencilled in for next year. Based on these estimates, shares in the company seem deeply undervalued, trading at a forward P/E of just 7.8 this year, and falling to 7.4 times for 2017.
Shares in Pendragon currently yield 4.3%, with its dividend being well-covered by earnings and free cash flow. It is on track to deliver full-year dividend growth of at least 9%, with significant further growth likely to come over the next 3-5 years.
Earnings per share covered its dividend by more than 2.8 times last year. And even with this year’s expected 9% dividend growth, dividend cover will likely remain over 2.7 times for this year. Moreover, Pendragon has in place a £20m share buyback programme, with £6.1m already purchased as of 25 October.
Transformative acquisitions
Drinks retailer and distributor Conviviality (LSE: CVR) is delivering a strong performance across all divisions. Group revenues for the first half of its 2016/7 financial year more than tripled to £783m, thanks to robust organic growth in the period and synergy gains from recent acquisitions.
Lately, the company has been expanding rapidly into the wholesale and events business, and has made three big acquisitions over the past year: Matthew Clark, Peppermint and Bibendum PLB Group. These acquisitions have helped it to lower costs through growing scale and expand its wholesaling expertise into new markets and channels.
Following these transformative acquisitions, city analysts are becoming more sanguine on the outlook for the company. Their earnings forecasts have been steadily rising over recent weeks, and they now expect the company to deliver underlying EPS of 39% this year, with a further expansion of 17% for 2017/8.
This means shares in Conviviality currently trade on a 2016 forecast P/E of 10.0, falling to a P/E of 8.6 for 2017. Dividend growth is expected to remain at double digit percentage levels too, with shares trading at a prospective yield of 6.1% this year, and 6.7% on its 2017/8 forecast — that’s a significant improvement on its current yield of 4.7%.
