This dividend growth stock is trading at an unbelievable valuation

Edward Sheldon looks at a technology focused small-cap dividend stock trading on a P/E of 8.

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Companies that regularly raise their dividend payouts often trade at premium valuations. However, today I’m profiling a company that has raised its dividend for the last 10 years, yet trades on a forward P/E ratio of just 8.2. Sound interesting? Read on to find out more.

Harvey Nash

The company is recruitment specialist Harvey Nash (LSE: HVN). With a market cap of just £65m, it certainly packs a punch for its size. The firm specialises in technology and digital recruitment, employing 9,000 freelancers across 39 offices in the UK, Europe, the US and Asia. Management has a clear strategy to grow the business and its vision is to be Europe’s market-leading technology and digital talent provider. Could this be a good way to play the technology boom?

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The company has grown its top line at a compound annual growth rate (CAGR) of a healthy 8% over the last five years and City analysts forecast a further 11% growth this year. The dividend has been increased from 2.66p to 4.09p per share in that time, a strong CAGR of 9%. The recruiter has made several key earnings-enhancing acquisitions in recent months, as well as undertaking a transformation programme in order to streamline the business and reduce costs, and this should provide further momentum going forward.

Today’s interim numbers look solid. For the six months ended 31 July, revenue rose 12.6% and profit before tax increased 16.8%. The company generated a 24.9% increase in earnings per share and hiked the interim dividend 5%. Performance in the UK was described as “robust in a weaker market,” while results in Asia improved, and European growth was strong. Chief Executive Albert Ellis commented: “We enter the second half of the year on track, well positioned to capitalise further on market opportunities as they arise and confident about the outlook for the remainder of the year.”

Investors should note that recruitment is a cyclical business and that as a small-cap stock, Harvey Nash’s share price can be volatile. Indeed, over the last 2.5 years, the stock has fluctuated between 50p and 120p. However, on a forward looking P/E ratio of 8.2 and dividend yield of 4.7%, I like the long-term risk/reward profile here.

A large-cap alternative

Those who prefer to stick with larger companies, might be more interested in Pagegroup (LSE: PAGE). With 140 global offices, 6,200 staff worldwide, and a market cap of £1.6bn, it is a key player in the global recruitment market. The recruiter’s objective is to expand into less developed recruitment markets, where growth is higher and competition is limited.

Being a larger company, it’s no surprise that Pagegroup’s recent growth has been a little slower than that of Harvey Nash. The company has generated five-year sales growth of 3.3%, with most of the growth over the period coming last year. Similarly, while it also has a solid history of dividend increases, the payout has only been lifted from 10p to 12p over the last five years, a CAGR of 3.7%. The current yield is 2.5%.

Is Pagegroup’s share price any less volatile as a larger company? Not necessarily. After trading as high at 530p in mid-2015, the share price fell to 260p last year after the Brexit vote, roughly the same 50% fall that Harvey Nash experienced. With that in mind, I’d probably prefer to invest in Harvey Nash for its digital exposure and high yield, over its larger peer Pagegroup.

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Edward Sheldon 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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