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2 small-cap dividend plus growth stocks I’d buy today

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Investing in sectors that are going through major changes can be exciting and profitable. But there are risks. Will the business you invest in end up fading away and become irrelevant?

The two companies I’m looking at today are both facing changes. But so far they’re both coping well, and are rewarding shareholders with strong dividend growth.

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Turnaround completed

After a difficult few years, public relations group Huntsworth (LSE: HNT) appears to be back on the growth trail. The company’s restructuring has increased its focus on the healthcare sector, where it is a specialist.

Huntsworth shares rose by 5% when markets opened this morning after the firm reported a strong set of 2017 results. Sales rose by 9% to £197m last year, while headline pre-tax profit rocketed 54% higher to £24.4m. Headline earnings per share rose by 45% to 5.8p per share, beating consensus forecasts of 5.35p per share.

These increased profits were backed by improved cash generation. Free cash flow rose from £2.9m to £20.7m, providing support for a 15% hike in the total dividend, which rose to 2p per share.

Time to buy?

Huntsworth shares have doubled in value over the last year, but I think the shares could still offer value for new buyers.

Earnings are expected to rise by around 10% this year, putting the stock on a forecast P/E of around 13. Dividend growth is also expected to remain strong and analysts have pencilled in a payout of 2.1p per share, giving a forecast yield of 2.6%.

I’d rate the PR firm’s shares as a buy at current levels.

Will this firm be crushed online?

Traditional advertising businesses are facing huge disruption due to the internet. Big advertisers are shifting billions of dollars of spending from television- and billboard-type advertising to Facebook and Google.

Internet advertising can be targeted and its results tracked in a way that’s impossible with mass media advertising. So are traditional ad agencies doomed?

Bosses at M&C Saatchi (LSE: SAA) don’t think so. In the firm’s half-year report in September, chief executive David Kershaw told investors: “We have been busy starting new businesses and opening new offices. This is the fuel for growth in years to come.”

The firm’s financial performance appears to back up these ambitious claims. Revenue, adjusted for exchange rates, rose by 12% to £121m during the first half. Adjusted pre-tax profit was 17% higher at £13.3m.

However, as my Foolish colleague Zach Coffell explains, these headline figures were flattered by the exclusion of certain items. The group’s statutory profits for the period actually fell, as costs rose more quickly than sales.

What’s happening?

Promoting a brand online and running successful, big-budget internet advertising campaigns requires skilled staff and a lot of data analysis. Most advertising agencies now offer this kind of service, so can acts as middlemen for advertisers wanting exposure online.

Saatchi appears to be investing for the future. This could pay off — indeed, I suspect the group will adapt and thrive over the coming years. However, with the stock trading on 16 times adjusted forecast earnings, I think much of the good news is already in the price.

At the very least, I’d want to wait for the firm’s full-year results later this month before making an investment decision.

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Roland Head has no position in any of the shares mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool UK has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. 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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