One penny share that has been on many investors’ minds lately is timber company Woodbois. I do not think its limited historical evidence of profitability makes it an attractive purchase for my portfolio at the moment. By contrast, here are three penny shares with proven business models in which I have invested.
Photo-Me
Vending specialist Photo-Me (LSE: PHTM) rejected a takeover bid led by its own chief executive this year. That was pitched at 75p per share. But I can now buy the firm’s shares on the stock exchange below that price.
If the boss thinks it is worth paying 75p per share for the company, I see value in buying the penny shares of this company more cheaply. Photo-Me returned to profit last year. Earnings per share came in at 5.78p. That comfortably covers the 2.9p per share dividend. At the current Photo-Me share price, the yield is 4.2%.
Ongoing lockdowns in some Asian markets pose a threat to revenues and profits. But I think the cash generation potential of Photo-Me remains high and own these penny shares in my portfolio.
Lloyds
Another of the penny shares in my portfolio is banking giant Lloyds (LSE: LLOY). The company made post-tax profits of £5.9bn last year. Its dividend yield of 4.5% looks attractive to me.
Is the dividend sustainable? For now it is well-covered by earnings. Indeed, Lloyds is so flush with spare cash it is buying back shares. But a looming recession could lead to higher loan defaults. That could take a chunk out of both revenues and earnings.
I think any bank could suffer from a recession. But I like Lloyds’ domestic focus, large customer base and strong brand. For now, I continue to hold it in my portfolio.
boohoo
Fashion retailer boohoo (LSE: BOO) has lost over three quarters of its value over the past year. It is one of the penny shares I have added to my portfolio in 2022.
There are clearly challenges for the company, from cost pressures to a slowdown in consumer spending. But these could also be opportunities. The firm’s low prices might attract new shoppers. Meanwhile, although profits plummeted last year, the company still managed to grow sales and make a small profit.
I expect a tough couple of years but am looking for the underlying business strengths to reassert themselves. If that happens, I am hopeful that the boohoo share price could move out of penny stock territory.
Why I bought these penny shares
I did not buy these shares just because they trade for pennies. Price is not the same as value.
In each case, they have well-proven business models and a history of profitability in many years. Companies that have not consistently turned a profit, like Woodbois, have not proven their business model to my satisfaction as a potential investor. Maybe Woodbois will do well in future, but for now it is hard to tell from its past performance how profitable its business model could turn out to be. So I have not bought it for my portfolio — but happily own the above trio of penny shares.
