Premium content from Motley Fool Hidden Winners UK
Our monthly Best Buys Now are designed to highlight our team’s three favourite, most timely Buys from our growing list of small-cap recommendations, to help Fools build out their stock portfolios.
“Best Buys Now” Pick #1:
City of London Investment Group (LSE:CLIG)
Why we like it: “Historically, dividends have made up an important part of the market’s total return, and perhaps for this reason investing for income is popular with UK investors. City of London Investment Group (LSE: CLIG), is a chunky yielder with a long-term record of growing income well ahead of inflation. Although dividend growth at the company has tailed off in recent years, and is largely dependent on the fund manager attracting new client money, we’re optimistic about the company’s attempts to win new business.
“Fund managers generate revenue by attracting investors into their funds and receive fees as a percentage of clients’ assets. One of the attractions of fund managers is that they have significant operational leverage – revenues typically grow at a rate that’s proportional to funds under management, and if costs stay the same, profits should grow at a faster rate. The company is cutting costs and, if a recovery kicks in and sales increase after costs have been reduced, then there’s a chance CLIG might enjoy strong profit growth.”
Why we like it now: Last month, City of London released its first quarter trading update, revealing net inflows of US$224 million across the Group’s strategies. This was driven by strong performance in International Equity strategies at CLIM and Municipal Bond strategies at KIM. These positive results may indicate the company’s resurgence after a challenging period in capital markets. Additionally, as previously announced, cost savings of approximately US$2.5 million per annum are expected to be fully realised in the next financial year. Currently, CLIG is trading with a 9.5% dividend yield. With sales activity showing signs of gaining momentum, the current price appears to offer a bargain.
