With valuations across the LSE rising and traditional income champions such as banks and miners still paying out relatively meagre dividends, income investors may appear to be bereft of sanely-valued options. But I have good news as digging around on the AIM has revealed two great stocks trading at under 15 times earnings while offering dividend yields above 4.5%.
Heating up or cooling down?
The first is air conditioner, pump and heater rental firm Andrew Sykes (LSE: ASY). The company operates in the UK, Europe and the UAE and mainly targets the commercial rental market. Shares of the firm currently trade at a relatively sedate 14 times trailing earnings and come with a 4.7% annual dividend yield.
Aside from a solid valuation and attractive dividend, I’m attracted to the company’s high margin, diversified business model. Renting out equipment, particularly in stable macroeconomic environments such as now, is highly profitable and generates prodigious cash flow. This is evident in the company’s 2016 results, which showed EBITDA margins were an impressive 31% and operations kicked off £15m of net cash on £65m in sales.
It was this cash flow that allowed the company to safely pay out £10m in dividends while still improving its net cash position to £17.6m at year-end. And with operations in a slew of large, wealthy countries the company’s downside is relatively protected against a downturn in any single market. Indeed, this was clear in 2016 as the group increased sales, profits and dividends even as a mild summer in the UK dented demand for air conditioning units.
With a reasonable valuation, bumper dividend, high margins and well-managed business model, Andrew Sykes is one small cap I’ll keep my eye on in the future.
A throwback business with forward-looking management
The second stock I’ve found that might meet value investors’ criteria is iron foundry Castings (LSE: CGS). While the business of metalworking may no longer be the growth industry it was a century ago, Castings is still a highly profitable business that trades at 13.9 times earnings and returns plenty of cash to shareholders.
Last year these shareholder returns amounted to a whopping 9.3% dividend yield when including a special 30p payout to shareholders. Although this payout is unlikely to be a regular occurrence, the company’s baseline 2.9% dividend yield is nothing to sneeze at.
As for the business itself, performance over the past few years has been uneven but with earnings largely unchanged from where they were in 2012. However, this isn’t too much of a worry as the group has no debt whatsoever and is setting the stage for future growth by investing in its high-tech machining capabilities. New foundries, 3D printers and automated manufacturing have allowed the company to better serve automotive customers and maintain margins in the face of low-cost competition from Asia.
These machining operations provide higher margins than the traditional foundry business and are set to grow nicely beginning next year as new contracts that are already signed begin paying off. If Castings can continue to maintain profits in the foundry business and grow the higher-margin machining business I reckon shares could be priced for perfection at their current valuation.
Add in a great dividend that is well-covered by earnings and Castings certainly looks to me like a solid income option as long as the automotive industry continues to hum along nicely.
