Is a penny share increasing its value by more than a quarter in less than one year a good or a bad thing? That may sound like a trick question. For me though, it is actually a real question as the penny share in question is one I own: Topps Tiles (LSE: TPT).
Of course, the 27% share price growth so far this year is music to my ears. But it is also bad news for me in the sense that it is still not enough even to bring the share back to the price I paid for it, let alone a higher level.
Over five years, the Topps Tiles share price is down by 15%.
Reassessing the basic investment case
Look at how that chart has moved sharply upwards recently though. What does this year’s strong performance tell us about how the company is seen?
I have long felt that Topps has an attractive business case. Builders and home decorators provide an ongoing demand for tiles and other wall and floor coverings.
Topps sells over a fifth of all the tiles bought in Britain. Its network of depots combined with an extensive online operation helps it target both trade and retail customers.
I also like the strategic way the company operates, with management proactively focusing on how to improve business performance.
Mixed performance in recent years
Still, while that investment case has long had appeal to me, clearly that has not been true for all would-be investors. After all, the company’s penny share status is a far cry from its heyday.
Back in 2007, the Topps Tiles share price was over £3 at one point. That much money today would be enough for someone to buy six Topps Tiles shares – and have a few pennies left over!
One reason the share has badly underperformed over the long term is the cyclical nature of its end market. There is always a baseline level of demand for tiles due to home renovation and new housebuilding. But there is also a variable element to total demand, based on the health of the property market overall.
The market is also very competitive, putting pressure on profit margins. In its unaudited full-year financial results published this month, for example, Topps reported revenue of £296m, 18% higher than last year.
A loss before tax last year was thankfully replaced this time around by a profit. But at £8m, that equated to a profit margin of under 3% — and that is before even taking tax into account.That is a thin margin.
I’m going to hang onto this share!
But while it has its fair share of challenges, I continue to like the business and was cheered by the solid performance the company reported this month.
The dividend has moved around in recent years, but the final dividend this time around is sharply higher than last year. The penny share now has a total dividend of 2.9p per share. At the current price, that equates to a 6% dividend yield.
I think the share continues to look cheap from a long-term perspective. I plan to keep it in my portfolio.
