Penny stocks tend to have volatile prices so it isn’t uncommon to see one surge 17% in a single day. However, not many pay a dividend.
Since they’re usually small, early-stage companies, they prioritise reinvesting any profits back into the business to fuel growth and support operations. So when I saw this small-cap Scottish IT company pop up on my radar yesterday (31 October) with a 6% yield, I had to investigate.
Reaching for the clouds
Glasgow-based iomart Group (LSE: IOM) operates within the cloud services and managed hosting sector.
Currently, its cloud services segment includes managed hosting, data security and storage solutions, generating over £100m annually. It’s increasingly focused on expanding cloud offerings through acquisitions and partnerships to broaden its reach. One recent example includes Kookaburra Topco, the holding company of Atech Support, a Microsoft Solutions Partner for mid-sized enterprises.
The focus of the expansion is to attract businesses that want advanced IT systems without building extensive in-house infrastructure. It’s particularly interested in sectors such as healthcare and finance where secure, scalable IT solutions are in high demand.
In addition to cloud services, it operates an Easyspace segment. This is a smaller part of the business, focused on web hosting services for small businesses and individuals. It brings in about £12m annually.
Financials
With a market-cap of around £95m, iomart maintains a manageable debt ratio of 19.6%, with short-term assets covering liabilities. However, its earnings have shown a slight decline recently, attributed to competitive pressures and the need for infrastructure investments in a rapidly evolving cloud market.
In its full-year 2024 results released in August, revenue increased 9.9% while earnings fell 7.9%. Despite the latter’s fall, the results exceeded analyst expectations for the stock.
Its trailing price-to-earnings (P/E) ratio’s attractive, at 13 times earnings. However, this is expected to rise to 20 times as earnings are forecast to decline. Despite these issues, it has a steady cash flow and its plans to expand through acquisitions could position it for a stronger competitive stance in the coming years.
I couldn’t find a reason for this week’s gains but analysts looking at the stock give it an average 12-month price target of £1.47. That would be a massive 97% increase from the current price of £0.74. I think that might be a bit optimistic, but who knows?
Dividends
The key value proposition of iomart is the 6% dividend yield. It has an acceptable if somewhat strained payout ratio of 86% and a fairly good track record of payments. However, while the yield’s increased in the past 10 years, the full-year dividen’s declined from 6p per share to 3.3p.
That’s followed the falling share price, which has dropped 76% in the past five years. In fact, the stock only recently achieved penny stock status after falling below 99p earlier this month.
Having done the research, I’m not convinced iomart’s on track to turn around its earnings just yet. It’s profitable for now but if that changes, the attractive dividend could be cut. I’d need to see more definitive evidence of growth potential before I buy.
That said, if its recent business acquisitions end up turning the share price around, I’d certainly reconsider the stock.
