The FTSE universe is filled with income-generating opportunities, some offering impressive index-beating payouts.
Somero Enterprises (LSE:SOM) is one such company with a generous yield that might be set to surge in the long run. That’s why I’ve already added this business to my portfolio.
Let’s take a closer look at the long-term potential and the risks investors have to consider.
At a glance
Despite being listed in the UK, Somero’s very much an American business. Around three-quarters of the group’s sales stem from North America, with the rest spanning across Europe, Australia and Asia. As such, its financial statements are all reported in US dollars, as are any dividends paid. That’s important to note, given the risk of fluctuating exchange rates.
But what exactly does this business do? Somero designs and manufactures laser-guided concrete laying screed machines. Whenever concrete needs pouring for a warehouse floor or car park, these machines can be bought or rented to ensure a smooth, high-quality finish while taking a fraction of the time and manpower compared to traditional methods.
It’s certainly not the only player in this space. But so far, the group’s technology seems to be a top-tier pick with a wide margin between it and competing solutions.
More concrete is needed
American civil infrastructure’s quite literally crumbling. That’s why the US government passed a $1trn infrastructure investment bill back in 2021 to fix the problems. Needless to say, it’s provided a lot of new growth opportunities for Somero to capitalise on.
Unfortunately, the construction industry’s notoriously cyclical. And with interest rates yet to be slashed, the higher cost of debt’s causing a lot of project delays. This, in turn, continues to adversely affect Somero’s cash flow, resulting in some pretty lumpy dividends over the years.
However, a lack of smooth earnings growth is nothing new in this domain. And management has almost two decades of experience as a public company navigating these tumultuous conditions.
It’s worth pointing out that over the last 10 years, despite the lumpy nature of profits, the stock’s climbed over 200%. That’s an average of 11.6% a year in just capital gains. Adding in an average 6% annual dividend yield over the same time period translates into impressive market-beating returns for patient investors.
Time to buy?
With the share price currently trading below pre-interest hike levels, Somero seems to be underappreciated by the market. More evidence of this can be seen with its relatively small price-to-earnings (P/E) ratio of just 9.4. And this depressed valuation’s a big contributor to the group’s generous yield.
But is this actually a possible buying opportunity? I personally believe so. And it seems management would agree, given it’s in the middle of executing a $2m share buyback programme.
With interest rates on track to be cut later this year, delayed construction projects are likely to resume. And if all goes according to plan, the firm will have plenty of projects to keep it busy and continue creating value for shareholders.
