These 2 small-cap dividend stocks still look like great buys to me

Looking for income? Paul Summers thinks these under-the-radar stocks are trading on very reasonable valuations.

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One of the worst performers in my own portfolio right now is online gaming provider 888 Holdings (LSE: 888). When I first began building a (small) position back in February, the shares had already lost 45% in value from the peak of 315p hit in 2018. Since then, they’ve lost another 25%.

Given this performance, you might ask why I don’t simply cut my losses and move on. Perhaps I should. Then again, today’s trading update — covering the period from the start of 2019 to 18 May — was fairly reassuring with management stating it was “confident” full-year figures will be in line with previous expectations.

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Like-for-like revenue grew by 6% over this time, helped by increased marketing spend and the launch of 888’s Orbit Casino platform.

The number of new customers also increased 20% year on year, something that newish CEO Itai Pazner believes is “a key indicator” of the company’s growth prospects. Most of the 18% rise in UK like-for-like revenue was attributed to “recreational customers“.  

Broken down, the firm saw 29% and 13% rises in Sport and Casino divisions, respectively. Revenue from Bingo was flat.

The Poker division continues to suffer, posting a 28% decline. Nevertheless, this drop was less than that seen in Q4 of the last financial year which could suggest the worst is now over. It might also explain why 888’s share price, while initially volatile, is now up over 4% as I type.

While it’s important to be wary of confirmation bias, all the reasons I invested in the company in the first place remain. High returns on capital, a huge net cash position, and great dividends (888 is forecast 7.3% yield in 2019).

The possibility of a takeover bid in an industry that’s seen its fair share of consolidation over the last couple of years is also getting more and more likely, in my opinion. 

Trading on 11 times forecast earnings before markets opened this morning, 888 might not be as cheap as some big dividend-yielders out there, but I submit its payouts look more secure. I’ll continue to hold. 

Bouncing back

Another stock I believe could be a great candidate for a ‘buy and hold’ income-focused portfolio is floorcovering distributor Headlam (LSE: HEAD)

Since tipping the company back in February, the stock has done very nicely indeed. It’s risen 20% in value and provided another example of how buying stock in quality companies when they’re unloved can, though certainly not always, pay off. 

In spite of this (and particularly after last month’s trading update), I still think the small-cap’s current valuation of a little less than 13 times earnings remains reasonable. 

Total like-for-like revenue increased 3.5% over the first four months of 2019 compared to the previous year. As 3.1% rise in the UK was attributed to a particularly strong performance in the commercial sector. Ongoing strength in the residential sector also led to a 5.8% increase in Europe. 

Headlam described these numbers as “pleasing” and made no change to its expectations for the full year, even though the second half is “traditionally stronger.” It’s next scheduled to update the market on 24 July. 

With a market leading position and a new regional distribution centre due to be operational next year, I’m optimistic on this reassuringly dull company’s long-term prospects. A forecast 5.2% yield, covered by earnings, is also very attractive.

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Paul Summers owns shares in 888 Holdings. 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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