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I’d buy this 7.5% yield for my Stocks and Shares ISA today

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When Britain comes out of lockdown, we’re going to be in a pretty severe recession. I want to buy strong companies for my Stocks and Shares ISA that are well set up for this weak economic environment.

I believe I’ve found a great option in RBG Holdings (LSE:RBGP). It owns the leading UK law firm Rosenblatt, which deals with white collar crime, financial fraud cases, and dispute resolution.

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Its £57m market-cap is at the lower end that I’d be happy to buy for my Stocks and Shares ISA. It’s not listed on the FTSE 100 or FTSE 250. Instead it’s listed on AIM, the growth-focused section of London’s flagship stock market.

A lot to like

So why have I got my eye on this share for my Stocks and Shares ISA? Rosenblatt employees own more than 20% of its shares, which makes for a strong internal incentive to build shareholder value. CEO Nicola Foulston says this is a key part of her strategy to motivate her people.

I particularly like RBGP’s very strong balance sheet. Crucially, it has no debt so it can spend its operating capital on growing the business and not on servicing loans. It also has a handy cash pile of £2m with £42m of assets. Also, profits are up 27% and the company reported a strong set of figures in April covering the period to the end of December 2019.

Then there’s that 7.5% dividend yield. That would compound very nicely in my Stocks and Shares ISA. As good investors, we can build up our ISAs towards the magic £1m number by picking high-yield dividend stocks. It’s certainly a lot easier to gain compound interest with a portfolio paying 7.5% than, say, 2.5%.

Investing post-Covid

I also think the future is bright for RBGP, while the UK economy faces dark days ahead. I think there’s going to be no shortage of work for this professional services law firm.

One high-profile case Rosenblatt worked on recently was for FTSE 250 firm Stobart, the owner of Southend Airport, in a bitter boardroom battle that saw the chief executive of the business sacked, to significant shareholder dismay.

And the number of dispute resolution cases like this, in which Rosenblatt specialises, will only grow as distressed business numbers grow.  

Stark analysis revealed in May 2020 by trade body the Corporate Finance Network, found that 61% of 16,000 SMEs had applied for the UK government’s Covid Business Interruption Loan Scheme. Only 9% had been accepted. Just a tiny percentage said they would be able to meet their tax liabilities in six months’ time. To that point, I’ve also invested recently in insolvency and turnaround companies like Begbies Traynor, Manolete Partners and FRP Advisory.

Undervalued

I think RBGP’s significantly undervalued at the moment. If you had bought shares in 2018, when the company made £3m pre-tax profit on £12.5m revenue, you’d have paid a high price of 18 times earnings. This year, the P/E ratio is significantly reduced: to 9.5 times earnings. In that time Rosenblatt has vastly improved its pre-tax profit, to £7.65m, and grown its revenue to £19.5m.

Rising earnings and profits? Check. High yield dividend? Check. Low price tag for the shares? Check. I’d definitely buy this for my Stocks and Shares ISA.

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Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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