The small and mid-cap section of the market is full of bargains yet many investors are afraid to tread there. But while small-caps do come with more risk, at the same time there’s usually greater return potential on offer, which more than makes up for the extra research required.
One attractive small-cap I’ve recently stumbled on is Hansard Global (LSE: HSD).
Dividend champion
With a market capitalisation of £120m, Hansard flies under the radar of most City investors, but you shouldn’t write it off.
Hansard is a long-term savings and investments manager with assets of £1bn under management. The company is clearly doing something right as during the last six months of 2016 AUM grew by around 10% from £923m to £1bn. However, while AUM is growing, earnings are not.
Over the past six years, pre-tax profit has declined from £11.1m for the year ending 30 June 2012 to £9.1m for the year ending this June. Still, the one area where Hansard stands out is dividends. For the past five years, the company has consistently paid out the majority of its earnings to shareholders via dividends, with the per-share payout never dropping below 8p.
For the current fiscal year, City analysts are expecting a full-year payout of 8.9p per share, which equates to a yield of 10.1% at current prices. The shares currently trade at a forward P/E of 23.1. Based on Hansard’s record of returning cash to shareholders, I believe the firm is an attractive long-term dividend stock.
Volatile income play
Recruitment agency Gattaca (LSE: GATC), which used to be known as Matchtech, has similar attractive income qualities. For the past five years, the company has consistently paid out around half of its earnings to investors via dividends.
Despite speculation that the business could come under pressure following the Brexit vote, Gattaca has proven its doubters wrong with net fee income rising 6% in constant currency terms over the six months to the end of January. City analysts are expecting this growth to continue with earnings per share growth of 26% pencilled-in for the year ended 31 July 2017 and further growth of 8% expected for the following year.
Based on these forecasts, shares in Gattaca are currently trading at a forward P/E of 7.1, falling to 6.6 for the year to July 2018. Furthermore, the company’s dividend payout per share is expected to rise from 23p to 23.5p, hardly explosive, but growth nonetheless. Based on Gattaca’s current share price, the payout is equal to a dividend yield of 8.1% and the payout is covered twice by earnings per share, so it looks safe for the time being.
Unfortunately, due to the nature of Gattaca’s business, the company’s dividend may not be a great long-term investment. Recruitment income is volatile and moves with economic growth, so a deteriorating economy would likely push management to cut the payout. Still, when times are good Gattaca is happy to reward shareholders and looks to be an attractive income play for now.
