While the BoE may have increased its base rate for the first time in a decade this morning, bond yields across the board are still hovering perilously close to zero. Together with relatively low yields from equities due to soaring share prices, income investors would be forgiven for panicking. However, it’s not all doom and gloom as I believe the 8.8% yield offered by PayPoint (LSE: PAY) and 4.21% yield of Tate & Lyle (LSE: TATE) may make them attractive income stocks.
Cash, cash and more cash
For those who aren’t familiar, PayPoint works with 28,000 retailers across the UK and offers services such as point of sale terminals, bill payment, ATMs and click-and-collect parcel deliveries. While the company does work with some large chain retailers, its focus is on small corner shops, a market over which it essentially has a stranglehold.
This strong competitive position, together with operating an asset-light business, means sky-high profitability. In the year to March, operating margins rose to 42.2% and earnings per share hit 64.3p. Furthermore, by the end of Q1 in June, the company’s balance sheet held a full £39.3m in cash.
This excess cash and high cash flow are why the company can afford to pay out such hefty dividends. In fiscal year 2017, total dividends were 120.6p per share, comprised of a 45p regular dividend, 38.9p from the sale of a non-core business, and a 36.7p special dividend that will be paid out in each of the next few years unless management finds a suitable acquisition.
PayPoint is not a rapidly growing business, but the rollout of its next generation point of sale terminal and other retail services in the UK, together with its fast-growing business in Romania, offer the prospect of steady growth over the coming years. Add in a strong competitive position, very successful management team and a large dividend and I believe its shares may be a bargain at 15 times forward earnings.
Full steam ahead?
Sugar and sweetener manufacturer Tate & Lyle’s H1 results released this morning held a nice surprise for income investors as management upped its dividend for the first time since 2015 on the back of double-digit profit growth. Analysts are now pencilling in a 4.5% yield for this year as the company benefits from a rebound in demand for artificial sweeteners and booming demand for bulk ingredients.
For the six months to September, constant currency group sales were flat, but adjusted operating profits rose a whopping 20% thanks largely to increased volume and prices for its bulk ingredients, which includes high fructose corn syrup and the like. The rollout of new speciality artificial sweeteners also played its part as volumes rose 3% and left the company on track to hit its 2020 target of $200m in annual sales from new products.
Rising cash flow also improved the company’s financial situation with net debt down to just 0.8 times EBITDA. The company is also looking attractively valued at just 13.7 times forward earnings. However, I’d personally hold off buying its shares for now as the company’s high exposure to US-Mexico trade could prove troublesome if Donald Trump convinces the US Congress to heavily modify or pull out of NAFTA altogether. But if the status quo stands, Tate & Lyle could be a very tidy income stock to consider.
Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of PayPoint. 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.