It’s no secret that defensive stocks often make wonderful long-term holdings for investors looking for dependable growth and good income potential. And while there are plenty of defensive stocks listed on the LSE, as far as I’m concerned few of them hold a candle to toilet roll manufacturer Accrol (LSE: ACRL).
Accrol also has the benefit of a very straightforward business model as it imports reels of paper in bulk and then converts them to toilet roll, kitchen roll and facial tissues at its Blackburn manufacturing plant. The company produces some own-brand products but the vast majority of its output is private label goods for major retail chains. Its core customer base includes discounters, which has kept growth high in recent years as they have taken market share from the big four grocers.
With over 50% market share in the discount space, Accrol is far and away the largest player in this growing market and is rapidly expanding its manufacturing facilities to keep up with this growth. In the year to April revenue rose 14.2% year-on-year (y/y) to £135.1m and EBITDA increased 6.8% to £16.1m
Increasing cash flow and year-end net debt of just £19m allowed management to both invest in new warehousing and production facilities as well as increase shareholder returns. Full-year dividends totalled 6p and were covered twice by adjusted earnings per share of 12p. At its current share price this works out to a 4.3% dividend yield.
On top of this very nice dividend the company’s shares trade at just 11.9 times forward earnings. Although the company’s profitability is exposed to global movements in paper reel pricing, this valuation looks quite attractive given the group’s solid growth prospects, healthy balance sheet and high income potential.
Higher risk, but higher reward?
For more risk-hungry investors, discount retailer Shoe Zone (LSE: SHOE) may present an intriguing option. The company’s shares are currently valued at just 9.8 times forward earnings and last year’s regular dividend of 10.1p represents a whopping 6.4% yield. In addition to the regular dividend there was also a special dividend of 8p that management intends to repeat whenever year-end cash balances exceed £11m.
The risky part of investing in Shoe Zone is that aside from facing the same sector-wide challenges as other retailers, the company is executing a strategy of shrinking to grow profits. This involves closing small, low-margin stores and opening up a smaller number of big box stores that cut down on rental, staffing and logistics costs. On top of this, management is also pushing to increase margins by directly sourcing product straight from overseas factories.
In the half to April the year-end store count fell from 518 to 504 y/y as part of this plan as the company closed small and medium-sized stores to trial new big-box outlets that are trading very well and will be rolled out across the estate. However, this did lead revenue to fall from £74.6m to £72.9m y/y although gross margins improved a full 170 basis points to 62.8%.
During this period the weak pound did cause underlying pre-tax profits to fall from £1.7m to £1.3m y/y but analysts still expect full-year earnings to more than cover dividends payouts. Shoe Zone is a risky income option but yield-starved investors who aren’t risk-averse may find it worth digging into.
