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2 hidden growth & income stocks that could still make you a million

Shares in currency manager Record (LSE: REC) are sliding today after the company reported its results for the half year to September. 

Repeating figures first published several weeks ago in a trading update, Record reported that assets under management rose to $61.2bn from $58.2bn at the end of March, although in sterling terms, AUM declined to £45.6bn from £46.6bn. 

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Still, despite the lacklustre AUM performance, pre-tax profit increased marginally to £3.8m from £3.6m in the prior year period, as revenue expanded to £12.2m from £10.7m. 

Off the back of these upbeat figures, management has declared a dividend of 1.15p, up 39% year-on-year.

Commenting on the figures, CEO James Wood-Collins said: “Overall it was encouraging to maintain revenues at levels consistent with the second half of last year despite the remaining UK-based Dynamic hedging clients deciding either to switch to lower-margin Passive hedging or to terminate their mandates during the period.

Growth slowing, cash returns rising 

For the past few years, Record has been going through a transition. As the company’s clients have become more conscious of cost, they’ve been switching to lower-cost (and lower-margin) passive hedging strategies helping the firm grow AUM. But profits have come under pressure. 

Nonetheless, overall profits have been ticking higher, and the company has been returning any excess cash to investors. 

The interim dividend hike follows a £10m tender offer for shares earlier in the year. Based on today’s payout rise, the shares currently support a dividend yield of 5.5%, with the payout covered 1.2 times by earnings per share, and backstopped by a debt-free cash-rich balance sheet. 

Even if growth remains sluggish in the years ahead, as an income stock that has a record of returning excess funds to shareholders, Record deserves a place on your watchlist. 

Boring but essential 

As well as Record, I’m keeping an eye on fast-growing administrator Equiniti (LSE: EQN)

Its business of managing the administrative side of pensions and investments is exceptionally boring, but it’s essential. The group’s size and experience mean that it dominates the market. Management is buying other similar businesses where the company can use its expertise to lower costs and improve margins. 

As Equiniti already has the processes in place, it can cut costs and improve margins quickly at the acquired businesses.

For example, the group is currently planning the $227m cash acquisition of Wells Fargo‘s share registration services business, which is expected to be earnings accretive in the first year. By stripping out duplicate functions, management expects $10m of cost synergies. 

At first glance, shares in Equiniti might seem expensive, as they trade at a forward P/E of 20.1. However, considering how one-of-a-kind this company is, it deserves a high valuation. Increasing growth acquisitions should help drive earnings rises over the years, ahead and when the company decides to dial back its expansion, dividends should follow. The stock currently yields only 1.5%. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Equiniti. 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.

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