Small-cap stock Tatton Asset Management (LSE: TAM) doesn’t get much media coverage. I ventured into the cobwebby Motley Fool archives this morning to find the last dedicated article on the company was one of my own from two years ago.
Back then, the firm reported strong operational progress, a growing dividend, and had a high yield — a rare combination. And, to me, the stock was attractive with its price near 207p.
A small-cap stock to watch
The business divides its activities into two reporting segments. And in the trading year to 31 March, the discretionary fund management arm, Tatton, delivered around 84% of overall profit before tax. The remaining 16% came from Paradigm, which provides support services for independent financial advisers (IFAs).
Today, the shares change hands around 431p. And shareholders will have enjoyed pukka capital gains and a rising stream of dividends. However, in fairness, most of the stock’s rerating happened in 2021. It ended 2020 around 270p. But the market has now recognised the company’s strong trading through the pandemic and ongoing growth in earnings.
Meanwhile, today’s full-year results report underlines impressive ongoing organic growth in trading. And, looking ahead, City analysts expect earnings to increase by around 16% in the current trading year to March 2022.
The figures are robust. In the 12 months to end-March, revenue increased by just over 9.3% and adjusted diluted earnings per share moved almost 23% higher. A more than 35% increase in assets under management to £9bn drove the outcome. And the company attracted a further 668 IFA firms to its services, representing an increase of more than 12%.
Strong organic growth
There’s no doubt Tatton Asset Management is growing its business well and most of the progress has been organic. I like the strong balance sheet with its net cash position of around £17m. And there’s a multi-year record of steady growth in revenues, with the turnover translating into generally rising cash flow and earnings. And since starting shareholder dividend payments around 2018, the directors have been pushing them higher by chunky increments each year.
Meanwhile, the quality indicators impress me. The operating margin and returns against equity and invested capital are all running at mid-double-digit percentages. However, this year’s rerating means the small-cap stock isn’t the bargain I reported two years ago.
At a price near 431p, the forward-looking earnings multiple is around 26 for the current trading year. And the anticipated dividend yield is near 2.7%. The market has priced the company for growth, which is fine as long as growth continues near its current pace. But that’s a big ask.
Another risk for new shareholders now is that underlying operations will be exposed to cyclical effects from the wider economy. Right now, the markets are booming and the economy is in recovery mode. But things could change in the years ahead.
Nevertheless, Tatton Asset Management has demonstrated its resilience and growth credentials. And I’d put the stock on my watch list, waiting for dips and down-days in the markets to offer me a more attractive buying point.
