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The prospect of a 7% dividend yield makes me keen on this company’s shares

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City analysts expect industrial services provider Hargreaves Services (LSE: HSP) to pay dividends yielding in excess of 7%. The projection covers payments for the current trading year to May 2021 and the year following.

They also expect generous double-digit percentage increases in earnings for those two periods. Meanwhile, in today’s half-year results report, the company revealed the disposal of its remaining coal assets for £24m. The post-period-end deal allowed the company to eliminate bank borrowing”.

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A fair valuation and a high dividend yield

I like the strong balance sheet and the decent growth prospects. I think the diversified operations remaining look well placed to thrive in a world building back from the coronavirus pandemic. Meanwhile, the valuation looks undemanding.

With the share price near 270p, the forward-looking earnings multiple is around 10 for the trading year to May 2022 and the anticipated dividend yield is about 7.5%. The price-to-tangible-asset value is running near 0.7% and that could be a decent metric to follow because Hargreaves Services owns land.

The company “controls” more than 13,000 acres of land across the UK and plans to realise “significant” value from the portfolio. One thing the firm does is to develop brownfield and derelict areas.

But that’s not the only arm to the overall business. There’s a distribution and services division engaged in processing and distributing bulk materials such as solid fuels, wastes and minerals. And there’s a specialist earthworks division working on large-scale infrastructure projects in the UK.

On top of that, the industrial services division provides materials handling, operation and maintenance. And electrical and mechanical engineering for the industrial sectors in the UK and Hong Kong.

A cash-producing associate

Hargreaves Services also has a stake in an associate German company called Hargreaves Raw Materials Services (HRMS). That company is a key” supplier of specialist raw materials to “major” European customers in the steel, foundry, smelting, non-ferroalloy, sugar, limestone, insulation, refractory and ceramic industries. And it was the HRMS joint venture that bought Hargreaves Services coal business.

The directors explained in the report that the sale of the speciality coal stocks to HRMS “accelerated” the realisation of the £24m of cash from the coal inventory. But the deal also helps the growth of HRMS by “opening it up” to new markets in the UK.

And HRMS contributes to the dividend returns on offer here. In today’s report, the company declared its intention to pay a 12p dividend from the German JV. That compares with the 2.7p interim dividend and there will also likely be a final payment for the year later.

Today’s figures show reduced revenue and earnings and the company puts that down to the “impact” of delays to the HS2 rail project. But there’s a “strong” pipeline of contracted works, a “good” bank of land opportunities and an “increasingly valuable” investment in HRMS.

Of course, further contract delays are possible and the pandemic could yet throw more challenges at the company’s operations. If projected earnings fall short of expectations, the valuation may end up being less attractive and the share price could fall from where it is now. Nevertheless, the stock tempts me.

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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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