This unloved 9% yielder could make you very rich

Bilaal Mohamed reckons this out-of-favour income share is primed for a comeback.

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Shares in the UK’s leading specialist distributor, Connect Group (LSE: CNCT), have been on the slide for just over a year now, and a few months back I picked out the small-cap firm as an attractive income buy, with its well-covered progressive dividend offering a juicy 7.3% yield at the time.

Diverse businesses

The Swindon-based distribution firm operates a number of diverse businesses in areas such as news & media, parcel freight, education and books. These include Smiths News, the UK’s largest newspaper and magazine wholesaling business, and Tuffnells, the leading parcel delivery specialist.

The group’s shares have continued on their downward trajectory during the course of the year, hitting five-year lows in October, despite a hike in the dividend announced with first-half results at the end of April. So what’s happened? Did I call this one wrong? Is it time to cut your losses and move on?

Dividend hike

No, let’s not be too hasty! I think it’s still worth hanging on to the shares for the longer term. Management has announced two dividends since my recommendation in March, totalling 9.8p per share, higher than the previous year, as predicted. With the depressed share price, that equated to a massive 9.6% yield at the time of the announcement.

Also in its favour is the fact that the sale of the group’s Education & Care division to RM plc, the education resources and software group, was completed at the end of June for £56.5m.The Education & Care division has been suffering from a decline in revenues, and would likely be further impacted by an increase in teacher pension and National Insurance costs that will need to be absorbed by school budgets.

Monster 9% yield

But what about the share price, is it going to recover? I’m pretty confident it will, and here’s why. First of all let’s look at why it continued plunging through to October, before we consider why it’s been staging a comeback since. Investors were frankly unimpressed with first-half results back in April, and perhaps rightly so, with pre-tax profits coming in 5% lower than the previous year, and revenues remaining broadly flat.

Full-year results in October weren’t much better, but this time the market reacted favourably, sending the shares soaring. It seems as though investors liked the fact that after the disposal of its Education & Care division, management is looking ahead to focusing on its News & Media, and Parcel & Fright divisions, developing the capabilities of these businesses to secure further efficiencies and generate organic growth opportunities.

As a result, the City is forecasting an uptick in both revenues and earnings in the current financial year to August 2018, leaving the shares trading on a bargain valuation of just seven times earnings, and offering a monster dividend yield of 9%. At these levels it could be worth holding on to the shares for capital gains along with the promise of even more generous dividend payouts.

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.

Bilaal Mohamed 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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