2016 was a rough year for Stock Spirits Group (LSE: STCK) as the Central European distiller suffered a profit warning and shareholder revolt that led to its CEO’s departure and a board shake-up. But with the dust clearing following these events, it’s time for income investors to revisit the company’s shares as they offer a trailing 4.1% yield and trade at an attractive 14 times forward earnings.
First off, the situation that caused the profit warning, increased competition in the Polish vodka market, is still present. But the situation appears to have stabilised. In its Q1 trading statement the company reported its market share was steady at around 25%, even as the market shrank by around 1% year-on-year (y/y). This is important as Poland is its largest market so any negative events there are felt dearly on the income sheet.
Elsewhere, the company’s turnaround plan under a new CEO is making progress with cost-cutting expected to trim €1.5m annually from back office costs by next fiscal year. And a slew of new distribution agreements have been signed with major global liquor brands while plans to begin exporting own-brand Polish vodka labels to the UK are proceeding.
All of these actions are intended to support future growth, but in the near term the company’s ordinary dividend looks very safe, although analysts expect it to remain flat this year. This is because, even as group sales stagnated from 2015 to 2016 at around €260m, underlying cash flow remained strong at €48.3m and more than covered the €39.2m paid in dividends.
However, last year’s ordinary dividend of 7.72 cents was bolstered by a special payout of 11.9 cents since the company had extra cash on hand due to not undertaking any large acquisitions. And that payout is unlikely to be repeated this year as the company has recently spent €18.3m acquiring a 25% stake in an Irish whiskey maker. This has led analysts to pencil in a yield of around 2.9% for 2017. A lower payout combined with troubles in Poland make me nervous, but I’ll be paying close attention to the company’s H1 results due to be released in early August.
Printing up profits
Another big dividend option trading at a low valuation is banknote manufacturer De La Rue (LSE: DLAR). The company pays a 3.7% yield based on last year’s 25p dividend and is valued at 13 times trailing earnings.
Given a supply glut in the banknote market and increased use of non-cash payments, De La Rue is looking to branch out from its core banknote production focus. So far through organic expansion and acquisitions, the group now brings in 25% of revenue and around 30% of operating profits from its authentication and anti-counterfeiting product lines.
And in the meantime, as the divisions grow, the company’s dividend is in pretty good shape. Payouts have been kept flat at 25p for three years in a row as the company rebuilds its balance sheet and earnings following a handful of disastrous profit warnings. And with net debt just £120m, or 1.2 times EBITDA, and earnings per share of 47.2p safely covering payouts, there’s reason to be optimistic.
However, with problems in its core business persisting and expansion into other business lines still in their early days, I believe there are safer, higher-yielding options out there than De La Rue.
