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2 Neil Woodford dividend champions I’d buy in 2018

After bottoming out at 60.75p per share in late November, the share price of specialist retailer Topps Tiles (LSE: TPT) has rocketed over 40% to trade above 86p as of this morning. But even after this mini bull run, the UK’s largest supplier of tiles and associated products to UK homeowners still kicks off a very hefty 3.9% dividend yield.

It’s little wonder then that Neil Woodford has built up a 5.1% stake in the company’s shares. And while Topps’ performance is tied to the health of the domestic housing market, investors who are bullish on the long-term outlook for the domestic economy could find now an attractive point to begin a stake in the company, trading as it is at just 11.6 times trailing earnings.  

And the company’s Q1 trading update released this morning show that consumer confidence in the housing market may be surprisingly strong. This is because the group’s like-for-like (LFL) sales rose a full 3.4% in the period, a significant increase from the 0.3% growth posted in the comparative period a year ago.

Positive same store sales have sent Topps’ share price up nearly 8% in early trading as it has lessened fears of another year of shrinking sales, as happened in the full year to September.  Last year LFL sales dropped 2.9%, which caused revenue to fall to £211.8m and adjusted pre-tax profits to drop from £22m to £18.6m.

However, even with this fall in profits the company was still in good shape with operations kicking off £22.2m in cash, net debt a mere £27.5m and dividend payments covered twice by earnings. And if Q1’s solid performance foreshadows a return to full-year LFL sales growth, I reckon Topps’ share price could continue its positive run for some time to come.

Cash, cash and more cash 

Judging by his funds owning a whopping 20% of its outstanding shares, Woodford is even more bullish on the prospects for PayPoint (LSE: PAY). The company, which offers point of sale solutions and ancillary services for retailers in the UK and Romania, kicks off a nearly 6% yield and trades at around 14 times trailing earnings.

These figures make it clear why value investors should be sniffing around PayPoint, and I think they won’t be disappointed in the company over the long term. This is because it has a stranglehold over the UK market for point of sale terminals to small retailers such as off-licenses.

The company charges these independent and chain customers a monthly rental fee for their terminals and also brings in revenue from offering additional services such as bill pay, click-and-collect for parcels, and ATMs that drive customer foot traffic and result in higher revenue for both the retailer and PayPoint.

In the coming years there’s significant scope for revenue from these retail services to grow at an accelerated pace as the new PayPoint One terminal is rolled out and drives revenue per retailer higher. In turn, this should increase its already prodigious cash generation that saw the business throw off £29.5m in operating cash flows from £97.6m in revenue in the six months to September.

With a huge pile of cash waiting to be returned to shareholders or invested in acquisitions, a sane valuation and market-leading position I see plenty to like about the firm.

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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.