A penny stock that offers growth, dividends AND value!

Searching for the best penny stock? Here’s one to consider that could offer plenty for small-cap investors to sink their teeth into, says Royston Wild.

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Tough market conditions have hampered Topps Tiles (LSE:TPT) and its share price in recent years. But City analysts think the embattled penny stock’s about to turn the corner.

Created with Highcharts 11.4.3Topps Tiles Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Here’s why I think it’s a top small-cap to consider, and especially at current prices.

Growth

Topps Tiles has been squeezed by rising interest rates and weak consumer spending power in the UK. Sales have slumped in the past two years due to the cooling housing market and disappointing consumer spending.

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City analysts are tipping a 51% earnings drop for the past financial year (ended September). However, they expect the company’s bottom line to rebound strongly from this year onwards:

YearEarnings per shareEarnings growth
20253.99p82%
20265.07p27%

These forecasts largely reflect predictions of a steadily fall in inflation that will prompt further interest rate cuts.

On top of this, robust growth estimates also signify Topps’ ability to outperform the market. Sales dropped 5.7% in the last year, far better than the 10-15% dip the company described for the broader market.

Dividends

Topps Tiles’ recent dividend history has, unsurprisingly, been up and down along with earnings. The annual payout was frozen in financial 2023. And though it kept the interim dividend locked last year, forecasters think the full-year payout will drop to 2.07p per share.

As you can see however, the number-crunchers also think rewards will grow strongly from this year onwards:

YearDividend per shareDividend growth
20252.94p42%
20263.48p18%

Dividends are never guaranteed. And weak dividend cover for the next two years means payouts could miss the target if profits disappoint. Forecast dividends are covered 1.4 times to 1.5 times by predicted earnings.

Both figures are below the accepted safety mark of 2 times. However, Topps’ strong balance sheet may allow it to meet broker forecasts even if profits disappoint. The firm had adjusted net cash of £19.3m as of March, latest financials showed.

Value

At 42.7p a share, the Topps Tiles share price offers excellent value based on expected earnings and dividends.

For fiscal 2025 and 2026, the firm trades on price-to-earnings growth (PEG) ratios of 0.3 and 0.5 respectively. Any reading below 1 suggests a share is undervalued.

Meanwhile, Topps’ dividend yield‘s a huge 6.9% for this year, and 8.7% for 2026. Both readings are more than double the FTSE 100 average of 3.6%.

A top penny stock

Topps Tiles looks pretty attractive based on the above criteria. But as with any share, investing in the company also involves taking on risk.

In this case, profits and dividend forecasts could miss by a wide margin if interest rates don’t continue falling. The impact on both the housebuilding and repair, maintenance and improvement (RMI) sectors could be devastating.

Having said that, I think the possible rewards of owning Topps shares outweighs these dangers, and especially at current prices. I also think profits could accelerate over the long term as the UK steps up homebuilding activity in the coming years.

On balance, I think it’s one of the best penny stocks to consider buying today.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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