Character Group (LSE: CCT) is in the toys and games business, and its profits depend on how well it can hit the spot with children, especially in the crucial Christmas market.
Given the faddish vagaries of kids’ tastes, my instinct is to keep away from such stocks. But Character does seem to be very successful at it, and right now it has Doctor Who offerings, Pokemon action figures, Peppa Pig, Fireman Sam… and a whole host of other desirable properties.
Character Group shares have been flat recently, but have soared by nearly 180% over five years. Most of that gain came in 2014 and 2015, but the intermittent nature of the toys and games market does mean we should expect volatility. And if you can handle that over the short term then I do think I’m seeing an attractive long-term investment here.
We’ve also seen a rapidly rising dividend over that period, and the year to August 2018 brought in a yield of 4.5%. I see that trend continuing too, and forecasts already suggest a yield of 4.8% for next year.
Character’s year was shaken by the failure of Toys R Us, which contributed to a 7.9% revenue fall to £106.2m, with pre-tax profit dropping 13% to £11.6m. But I was cheered by a strengthening gross margin, up from 32.6% to 34.2%, which impresses me in such a fiercely competitive retail market.
Net cash increased from £11.5m to £15.6m too, and to me, Character’s balance sheet looks better than I’d expect for a company whose shares are trading on a P/E of only around 10. I see a long-term cash generator here which should be able to keep those dividends flowing.
Dixons Carphone (LSE: DC) typically enjoys good trading over the festive season with mobile phones being on so many people’s Christmas lists. But the past year has not been kind, as a tough retail environment coupled with increasing levels of credit exposure risk have taken their toll.
As a result, the shares are down 20% since the beginning of 2018 — and they’ve shed 68% since Christmas 2015.
But I can’t help feeling there’s far more pessimism built in to today’s share price than is actually warranted, and I reckon I’m seeing a contrarian recovery bargain here.
Yes, there’s a 22% fall in EPS suggested by the market’s analysts for the year to April 2019. But that would put the shares on a P/E of a mere eight, and I see that as an overreaction on at least two counts.
One is that dividends, while expected to remain flat over the next couple of years, would yield close to 7% now that the share price has crumbled — and they’d be covered 1.8 times by earnings.
The other is that Dixons Carphone is strongly cash generative, with free cash flow of £172m last year, and isn’t shouldering too much net debt at £249m (down £22m from the previous year). That net debt figure comes in well below the year’s £382m headline pre-tax profit.
The balance sheet is surely not going to look as good this year, but I see plenty of safety margin — and if the dividend is maintained, I can see the share price bouncing back.