There are many different types of penny stock. Some have been beaten down over the past few years and are occasionally great contrarian buys. Others are still in their infancy and may be experiencing massive growth. But very few offer dividend yields of over 5%. The gold miner Pan African Resources (LSE: PAF) does just this. Here are the reasons why I’d buy today.
Trading update
Yesterday’s trading update was excellent, and although the stock rose around 4%, I think there’s plenty more to go. In fact, due to an increase in gold production, to over 200,000 ounces, the company saw record annual profits after tax of $74.7m. This is a 69% increase from last year.
In addition to the healthy profits that were generated, PAF was also able to reduce net senior debt by 46% to $33.7m. This means that the company has finished its financial year with a far healthier balance sheet. Accordingly, it should be able to increase how much money can be returned to shareholders.
And it’s doing just that. Due to the excellent results, the dividend has been raised by 28.5% to a record 0.916p per share. This equates to a dividend yield of 5.4% at the penny stock’s current share price. It is also comfortably covered by profits, which will allow the group to continue to invest in itself and reduce debt further.
In addition to the record dividend, the board has also approved a share buy-back programme, of which details will be announced soon. Over the past few years, PAF has not bought back its own shares, so the fact that it’s starting to do so now shows real optimism. It should hopefully have a positive effect on the PAF share price.
Other factors
One reason why PAF was so successful in the past year was due to the high price of gold. In fact, last year, the average price of gold received was $1,826 an ounce, compared to $1,574 the year before. This demonstrates the company’s reliance of the price of gold though, a factor which may hinder it in the future. Indeed, the price of gold has already fallen below $1,800, and many fear there is further to fall. This is the main risk with this penny stock.
Even so, other than the potential for the price of gold decreasing, there are currently no other signs that this was a one-off year. For the year ending June 2022, PAF remains committed to producing a minimum of 195,000 ounces of gold, and I believe that it will be able to exceed this. And it also hopes to increase shareholder returns further, a sign that the best is yet to come.
What’s next for this penny stock?
For now, I feel that short-term volatility will continue. But for the long term, I’m confident and this is the reason why I originally bought PAF. I also believe that the stock has been oversold in recent weeks. As such, it currently trades on a very low price-to-earnings ratio of 6. This illustrates that the share price is too low, and I’d have no hesitation in buying more shares.
