The Alternative Investment Market (AIM) is home to a vast range of small companies, many of which offer impressive yields. But few compare to the 7.3% payout currently being offered by Somero Enterprises (LSE:SOM).
As a designer and manufacturer of concrete-laying screed machines, Somero plays a vital role within the US construction industry. Sadly, this sector has encountered multiple headwinds lately due to higher interest rates as well as poor weather.
Yet, the cash-generative nature of this business has kept it relatively resilient. And while sales and earnings have suffered, the long-term potential of Somero continues to look promising, despite what the 15% slide in the share price would suggest these past 12 months. Does that mean now’s the time to start buying more? Let’s explore.
Exploring international opportunities
With the US government ramping up funding to renovate infrastructure across the country, the opportunities for Somero to expand in its core market are bountiful. But management hasn’t lost sight of the potential lying within the Australian and European markets.
Total sales from Australia grew by 17.9% to $9.9m in 2023. And while overall growth in Europe came in flat, sales from parts and services grew by 19% versus 2022. Across both markets, Somero sucessfully acquired new customers as well as introducing new products.
Sadly, this encouraging performance was dragged down by activities in North America, which suffered a 13.2% decline in revenue to $88.4m. Several non-residential construction projects that Somero’s customers were involved in were delayed last year, dragging down performance.
However, none of these projects have been cancelled. And activity in this sector has been steadily rising across the last few months as construction companies adapt to the new economic landscape. Pairing that with the planned launch of three new screed machines, 2024 could be a terrific turnaround year for Somero’s cash flow, earnings, and dividends.
Every investment carries risk
Despite being listed on the London Stock Exchange, Somero is actually an American business. Subsequently, it pays its dividends in US dollars rather than pounds sterling. This introduces a bit of currency conversion risk to its impressive 7.3% dividend yield.
But more concerning is the weather. While climate change may not seem like an immediate threat, the rising number of storms in North America has already started impacting this business. After all, construction companies can’t pour concrete while it’s raining, leading to project delays that, as previously highlighted, directly impact Somero’s top line.
Having said that, the company has a long track record of navigating around such issues. And while it does cause earnings and cash flow to be a bit lumpy, the $33.3m of cash & equivalents on its balance sheet provides ample financial flexibility.
Therefore, while the short-term trajectory of this income-generating stock is uncertain, the long-term potential looks promising, in my eyes. As such, today’s cheap-looking valuation looks like a buying opportunity, in my opinion. It’s on my shopping list for this month.
