When searching for yield, most investors focus their attention on large-cap shares. However unbeknown to many, it’s possible to find reliable dividend payers in the small-cap area of the market that punch above their weight. Here’s a look at two small-cap dividend growth stocks that pack a hefty punch and that I currently have my eye on.
Numis Corporation
£295m market cap Numis (LSE: NUM) is an independent institutional stockbroker and corporate advisor. The firm offers a broad range of services to its clients including investment research, execution, corporate broking and advisory services.
Its financials look quite impressive, with the company exhibiting a strong operating margin (29%), excellent return on equity (22%) and low levels of debt. And revenue has increased from £54.2m in FY2011 to £112.3m for FY2016, a compound annual growth rate (CAGR) of 15.7%.
But what really appeals to me about this small-cap company, is its dividend growth track record. Indeed, since paying a maiden dividend of 0.8p in 2000, the company has never cut its payout, even during the Global Financial Crisis. Last year Numis paid out 12p to its shareholders, equating to a yield of a generous 4.6% at the current share price. Furthermore, over the last five years alone, the dividend payout has been increased from 8p to 12p, a CAGR of an impressive 8.5%. And the dividend is covered 1.9 times, indicating a decent margin of safety if profitability was to decline.
FY2016 numbers were good, with revenue jumping 15% on last year, earnings increasing 21% and the company’s cash pile growing from £60m to £90m. However, despite the firm’s impressive numbers, Numis shares can be purchased on a forward-looking P/E ratio of just 10, which looks attractive to me given the company’s impressive dividend history. It’s worth noting that the shares have jumped from just over 200p a year ago to 260p today, but despite the rise, I still think value is on offer.
Low & Bonar
Another company that has done well recently is £265m market cap Low & Bonar (LSE: LWB). While the performance materials group doesn’t have the same kind of impressive recent revenue and earnings growth as Numis, its dividend growth history is still quite virtuous.
Indeed, the company has grown its dividend payout at a CAGR of 7.4% over the last five years, paying out 3p per share last year – a yield of 3.7% at the current share price. On earnings of 6.15p per share, dividend coverage is a respectable 2.1 times.
The group released a concise trading statement last week for the period since 30 November 2016, stating that it had made a good start to the year and that the board continues to believe that 2017 will be a year of “significant progress.”
The share price shot up as a result and has now risen 34% over the last 12 months, however with City analysts forecasting earnings per share of 7.3p for this year, the stock trades on a P/E ratio of just 11.1, which doesn’t look expensive to me.
