One 9% dividend stock and one growth stock I’d buy and hold for a decade

Small-cap stocks can often offer the best combinations of growth and dividends. Here are two complementary picks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

What would you say to a tiny-cap prospect that’s been losing money for the past few years and has seen its share price slump? 

You might want to run for the hills, as that’s what’s happened to Sinclair Pharma (LSE: SPH), whose share price dipped a further 10% Monday after the firm release full-year results and warned that 2018 margins are going to be weaker than expected.

Although the company, which makes aesthetics products, recorded sales of £45.3m (up from £37.8m the year before), and saw sales of most of its products rising, we still saw an operating loss of £2.2m — and net debt stood at £3m at December 2017.

The company is expected to make a very small profit this year, followed by something more substantial in 2019 when forecasts suggest a P/E of 12.5 on the latest share price.

The other news today, which is a bit of a double-edged sword, is the announcement of a new €23m debt facility. Part of that will be used to repay more expensive bank debt of £5m, and some will be used to fund growth.

On the upside, it should mean that Sinclair now has the funds to see it through to renewed profitability. But the downside lies in the potential effective dilution of shareholders’ interest depending on how much of it is drawn. It has to be repaid by April 2023, and there’s a risk now that the company might overstretch itself in the use of that facility. If it can’t repay on time, there could be more funding needed.

I still think this is a buying opportunity if you can handle the risk, and I’d be looking for Sinclair to be as conservative as it can with the level of new debt it actually draws.

Dividend cash

What better to accompany a risky growth pick than a big dividend payer? It’s PayPoint (LSE: PAY) I’m thinking of, and the special dividends its been paying as it returns surplus cash to shareholders. 

Forecasts for the current year suggest a total payment of 83p per share, which would provide a yield of 9.6%, and that should be followed by two more years of similar cash returns. It won’t be covered by earnings, and it obviously can’t go on for ever.

But even if payments should revert to last year’s ordinary portion of 44p when the surplus capital is exhausted, that would still yield 5.1% — and I can see the ordinary dividend doing better than that and at least keeping pace with inflation in the next few years.

Long term, I can only see PayPoint’s business growing. It’s already pretty much dominated the point-of-sale payment terminal business in the UK, and it’s growing in other countries too, starting with Romania.

At the interim stage, the company was making gross margins of 48.5%. That’s slightly down from 49.1% a year previously, but unless that should evolve into a long-term decline, it doesn’t worry me.

The company enjoyed first-half pre-tax profit of £24.4m, with operating cash flows amounting to £29.5m. 

Forecasts suggest a 4% decline in EPS for the full year, but it should soon turn back up again. And with the shares on a forward P/E of under 14, I’m seeing an undervalued cash cow here that I reckon could have a great decade and more ahead of it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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.

More on Investing Articles

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »