When it comes to shares offering plenty for both growth and income investors it is hard to look past Headlam Group (LSE: HEAD) as demand for its floor coverings detonates across Europe.
I am less optimistic over the investment profile of Telit Communications (LSE: TCM), however, even if latest trading details released on Friday stopped the recent stream of disastrous market updates.
The AIM-quoted firm announced that revenues clocked in at $255m between January and September, and that it remains on course to hit the downgraded targets laid out in November. Telit cut its earnings targets then due to greater-than-expected “pressure on gross profit margins stemming from the transition from 2G and CDMA products.” These technologies have larger margins than the newer LTE products.
Today the business also affirmed hopes that sales should detonate sooner rather than later, the internet of things enabler saying that US certifications last year should underpin “double-digit revenue growth” in 2018. And in other news, the tech colossus said that cost-cutting initiatives should reduce cash operating expenses by $10m next year, down 7% from this year’s anticipated levels.
Dividends set to dive
Now Telit has record blistering profits growth over the past five years but, in acknowledgement of the company’s current margin problems, the City is expecting earnings to skid 52% lower in 2017.
The prospect of diving profits is expected to weigh on dividends also. Last year’s payment of 7.4 US cents per share is expected to skid to 3.1 cents in 2017, resulting in a yield of just 1.4%.
On the plus side, the Square Mile is anticipating that earnings will bounce 67% in 2018, and that this will drive the dividend to 7.4 cents and therefore the yield to a much-improved 3.4%.
But in my opinion there is still too much adverse noise facing Telit right now to justify investment. Of more immediate concern is the state of the firm’s balance sheet, particularly after it warned today that it is in advanced discussions with a lender so as not to breach its debt covenants in the coming weeks.
With the Financial Conduct Authority also having launched “preliminary enquiries” into the firm last month following the much-publicised boardroom intrigue, and the business also carrying a slightly-expensive forward P/E ratio of 17.4 times, I see little reason to buy today.
Monster yields
At the opposite end of the scale, City analysts are quite chipper over Headlam’s earnings outlook in the near term and beyond.
During 2017 the Birmingham business is predicted to churn out a 6% earnings improvement, keeping its recent record of robust growth going. And in 2018, forecasts suggest that a return to double-digit growth is just around the corner, an 11% improvement currently suggested.
These predictions make Headlam a snip, its forward P/E ratio of 12.9 times falling well below the widely-accepted value watermark of 15 times.
And as I said earlier, the flooring giant also offers lots for dividend chasers to get their teeth into. Headlam has lifted the ordinary full-year dividend at a compound annual growth rate of 8.7% over the past five years whilst it has also furnished investors with special dividends in that time.
Last year’s 22.55p per share ordinary dividend is predicted to rise to 24.7p in the outgoing period, and again to 26.8p in 2018. As a consequence Headlam boasts gigantic yields of 4.7% for this year and 5.1% for next year.
