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Forget the FTSE 100! I’d go for this small-cap’s 6% dividend and growth potential

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Several big FTSE 100 companies pay large dividends yielding 5% or above, but often the potential for those dividends to grow is limited. However, some small-cap companies have big dividend yields too. And sometimes they have greater potential for growth in both the dividend and the share price.

I reckon diversified industrial and property services provider Hargreaves Services (LSE: HSP) is a good example. City analysts following the company expect impressive increases in earnings and shareholder dividend payments over the next couple of years, and potentially beyond that. If things work out well, the share price could rise too.

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Recovery and growth

With the shares at 311p, the forward-looking dividend yield for the trading year to May 2021 is running above 6% and the earnings multiple is just over 15. And I think the valuation anticipates further recovery from what chairman Roger McDowell describes in today’s half-year report as “challenges” faced by the firm in the year to May 2019.

The half-time figures reveal to us that underlying earnings per share rose by 18.5% compared to the equivalent period the year before. But the company has been busy with acquisitions and disposals, which puts the business in a state of flux. However, that situation is a big part of the attraction because the potential for growth is building, in my view. For now though, the directors held the interim dividend flat.

Net debt increased in the period by just over 21% to almost £35m, not including lease liabilities, because of increased inventory levels, which strikes me as being a manageable level for the firm. Meanwhile, its activities in its Distribution and Services division delivered 77% of overall profit before tax in the period. Some 13% came from the company’s German associate HRMS, 8% from unallocated and legacy businesses, and just 2% from Land.

Big potential

But the directors see big potential in the land assets. After “a series” of strategic acquisitions, the land portfolio in the UK  amounts to around 15,000 acres. The directors plan to add value to the land by developing it. My guess is that the division could deliver a bigger share of company profits later.

McDowell explained in the report that the directors are focusing on delivering “reliable and growing” profits from the distribution and servicing businesses owned by the company. They also want to “unlock” capital from the division, which should allow “strong cash returns to shareholders” alongside investment in the growth of Hargreaves Land.

Meanwhile, McDowell said the German associate has “the full support” of the Hargreaves directors as it develops from a pure trading business into supplying and recycling specialist raw materials for the German manufacturing sector. 

I like the look of this firm and can see decent potential for an investment in the shares. I’m tempted.

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Kevin Godbold has no position in any share 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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