Why I think this income stock yielding 7.6% deserves a place in your ISA

With a 7.6% dividend yield and 70% of its company’s market cap in cash, this income champion would make a great addition to any ISA, says Rupert Hargreaves.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Today, sofa and flooring retailer SCS (LSE: SCS) reported an increase in gross sales of 2.1% for the 26 weeks ended 26 January and a rise in gross profit of 1.5%. Underlying operating profit also improved by £0.3m to £0.8m. Impressive?

Certainly, considering the state of the rest of the UK retail industry. The fact that SCS is still growing, albeit slowly, at a time when many other UK retailers are struggling to survive is notable.

What’s more notable in my opinion, however, is the company’s cash generation. During the 26-week period the company generated £20.7m in cash from operations, up £2.5m year-on-year, or just under 14%. With cash flowing into the group’s bank accounts, SCS’s net cash balance at the end of January hit £62.5m, a staggering 70% of its market capitalisation at the time of writing. 

Cash cow

Few other companies have such a strong, cash-rich balance sheet, and that’s why I think this stock deserves a place in your ISA today.

Alongside today’s numbers, management also announced an increase in the group’s interim dividend of 3.8% to 5.5p. A similar full-year increase will give a total payout of 16.8p per share for 2019, offering a yield of 7.6% at the time of writing, according to my number crunching.

As the total dividend only cost the firm £6m last year, it looks as if SCS has more than enough capital to meet its dividend obligations for many years to come. 

Keeping your portfolio fit

One future income champion that I also think would be worth keeping an eye on is The Gym Group (LSE: GYM).

This company is still in growth mode. Today, it reported a 35.6% increase in revenue for the year to the end of December 2018. Adjusted profit before tax increased 19.4% to £14.4m. Off the back of this growth, management has announced an increase in the full-year dividend of 8.3% to 1.3p.

At the current share price, a distribution of 1.3p gives a dividend yield of 0.6%, which I don’t think is particularly attractive when the market average is above 3%. However, it’s the Gym Group’s future potential that really gets me excited.

Last year, the company generated just under £34m in cash flow from operations. Right now, all of this money and more is being reinvested back into the business. But the figures tell me that when management decides to take its foot off the growth pedal and start returning cash to investors, returns could soar.

Indeed, according to my research, the average profit margin on each of the Gym’s established locations is over 40% and return on capital — a measure of profitability for every £1 invested in the company — is above 30%.

In my opinion, these high levels of probability imply the company is a future dividend champion. With earnings set to expand another 38% in 2019, according to the City, it also appears as if the shares are undervalued on a group basis as they are currently dealing at a PEG ratio of 0.8.

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended The Gym Group. 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

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »