This high-yielding stock is trading at a bargain-basement valuation

This under-the-radar growth and income star is trading at a very attractive valuation.

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Until the downturn in oil & gas markets forced it into keeping dividend payouts level last year, energy consultancy RPS Group (LSE: RPS) had strung together 21 consecutive years of increased dividend payments. For any company exposed to the sector to even maintain payouts last year was a feat in itself and its 3.65% yield should not be sneezed at.

And half-year results released this morning bode well for income investors for several reasons. The first is that the interim payout was hiked from 4.66p to 4.8p year-on-year (y/y). The second is that management’s decision this time last year to halt acquisitions and focus on de-leveraging the balance sheet has worked well. The group’s net debt-to-EBITDA ratio has fallen from 2.2 times to 1.5 times y/y and management is now confident the balance sheet is healthy enough to increase dividends as well as to resume looking for suitable acquisitions.

With a resumption of the group’s acquisition-led growth policy, investors have good reason to expect rising earnings and eventually rising dividends in the near future. A return to buying up small consultancies in Europe, Australia and North America is also to be welcomed as it will allow the company to further reduce its dependence on the oil & gas sector. Management had already been doing this with all of its £124m spent between 2014 and 2016 on acquisitions directed to companies without direct exposure to oil & gas markets.

This strategy is already paying off as sales and profits returned to growth in H1 boosted by the weak pound and high activity from its property development and management businesses in the UK. With about 18% of fees in H1 coming from businesses in the oil, gas and Australian resources sector, RPS is still exposed to weakness in these markets. But with the balance sheet back in good shape, management looking forward to further acquisitions and a resumption of dividend payment growth, RPS could be a relatively safe way to gain exposure to these sectors for growth and income investors.

Too risky?

Another company with a solid history of dividend growth is agricultural products and engineering firm Carr’s Group (LSE: CARR), which from 2012 to 2016 increased dividends per share by 30% to 3.8p so that they now yield 2% annually.

Unfortunately, reliable dividend growth hasn’t been matched by stable earnings growth due to the cyclical nature of the agricultural bit of the business. As earnings from the agriculture division fluctuated based on dairy and raw material prices, they had an outsized effect on group results since they accounted for roughly 90% of revenue last year.

While the engineering division should be more reliable, it’s also not without its faults as a delayed contract caused a profit warning in March and led analysts to forecast a 20% fall in earnings for the current fiscal year. This contract has now been signed, but the delay will likely severely impact the already low group operating margins that were just 4% last year.

Stocks that are cyclical or very low-margin always make me apprehensive. The combination of both in Carr’s Group, together with a pricey valuation of 16 times forward earnings, will have me taking a hard pass on the company’s shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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