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Should you snap up – or sell – this top income stock after today’s results?

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For some time now, £580m cap photo booth supplier Photo-Me International (LSE: PHTM) has been a great stock for income investors to hold thanks to the company’s policy of making regular, double-digit hikes to the dividend. Do today’s interim figures change things? Let’s take a look.

Exceeding expectations

With sales growing by 19.2% and pre-tax profits rising by 20.2% to £31m (4% and 4.3% increases at constant currency respectively), it looks like the good times are set to continue. Much of this performance can be put down to the rollout of Revolution — the company’s laundry business. If anything, this highlights how seemingly dull services can be real money-spinners for both companies and their investors. Sometimes, boring can be beautiful.

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As an aside, Photo Me’s balance sheet remains strong with the company now having a net cash position of £68m — £5.6m less than in April of this year. Although some debt isn’t necessarily a bad thing, this kind of financial discipline is something I look for in a business.

Perhaps most importantly for income investors, the company has remained true to its dividend policy and raised the interim payout by another 20%. This leaves Photo Me offering a yield of around 4.5%. Although cover is looking a little stretched, that’s an awful lot more than you’d get from any cash savings account.

Commenting on results, Non-executive chairman John Lewis reflected that performance in the first half was “ahead of the board expectations” and that it now expects Photo Me’s profits will “significantly exceed current market expectations”. That’s the sort of positive talk I like to hear. So long as the company can continue this momentum (and carry on generating excellent levels of return on capital and high operating margins), it’s very likely that it will smash through the recent share price peak of 182p in the near future. It’s already well on its way — rising over 6% in early trading.

Any downsides? Well, on a forecast price-to-earnings (P/E) ratio of just under 19, shares in the business aren’t exactly cheap. With this in mind, let’s look at a candidate that could steal Photo’s Me’s crown of top small cap income share — the UK’s leading independent toy company, Character (LSE: CCT).  

Dividend delight

Since reporting full-year figures to the market at the beginning of the month, shares in the £111m business, which owns licences for brands such as Peppa Pig, Teletubbies and Stretch Armstrong, have jumped 10% to 521p. With revenue and underlying pre-tax profits both rocketing 22% (to £121m and £12.5m respectively), such a rise was always on the cards. Despite this, shares still trade on a relatively low forecast P/E of just 10.

However, it’s the cracking 33% increase to the interim dividend that really grabs my attention. This leaves the company’s shares generating a well-covered yield of 3.2%. Only boards with strong confidence in the future health and growth prospects of the company would contemplate such a move.

With a level of financial discipline to rival Photo Me (including a 53% rise in its net cash position on 2015) and similarly high levels of return on the capital it invests, Character ticks a lot of boxes. Like Photo Me, Character also has a growing international presence, with sales from overseas rising a barnstorming 50% over the last reporting period. With Brexit at least somewhere on the horizon, this can’t be a bad thing.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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