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I’m keen on XPS Pensions (LSE: XPS), the pensions advisory and administration business. And today’s full-year results report contained some reassuring figures. Revenue for the trading year to 31 March rose by 7% compared to the previous year. And adjusted diluted earnings per share moved 2% higher.

Robust cash flow and dividends

The directors signalled a positive outlook and satisfaction with the outcome by raising the total shareholder dividend for the year by 2%. And XPS hasn’t missed any dividend payments because of the pandemic, suggesting a resilient underlying operation. In one indicator supporting that assumption, operating cash flow has been robust.

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On top of that, XPS didn’t take up any of the Government Covid-19 support loans or furlough any of its staff. However, the company moved staff to home working at the start of the year and maintained “strong” client service through the challenges of the pandemic.

The directors said robust client demand across all pension divisions drove the year’s revenue growth. And much of the advance was organic in origin, helped by a regulatory tailwind. A new pensions bill and associated regulatory changes should continue to drive demand for the firm’s services, they think.

A “high proportion” of the company’s revenues are non-discretionary (that is, essential). And part of the strategy is to grow the services to existing clients following regulatory and market changes where clients need support.  So the current high level of regulatory change is one of the company’s opportunities.

Other routes to growth

XPS also aims to expand by gaining market share. And there’s a healthy pipeline of new business opportunities to pursue.

A third route to expansion via mergers and acquisitions is also a “core” part of the company’s strategy. XPS has executed three bolt-on acquisitions in recent years. And the directors reckon the company operates in a fragmented market ripe with further consolidation opportunities.

Overall, the outlook is positive. And the directors expect the business to deliver “at least” mid-single-digit percentage organic growth in revenues over the medium term. 

Meanwhile, with the share price near 138p, the forward-looking earnings multiple for the current trading year to March 2022 is just below 14. That’s set against analysts’ expectations for a mid-single-digit percentage increase in earnings. And the anticipated dividend yield is 5%.

I’d buy the stock for income from the stream of shareholder dividends and for steady growth from the business and the share price. However, with its market capitalisation near £284m, XPS is a small-cap company and smaller businesses can suffer from volatility. It’s possible for analysts’ assumptions to prove incorrect and I could lose money on the shares. Indeed, the share price was once much higher than it is today.

Nevertheless, I’d embrace the risks and aim to hold the stock for the long term as part of a portfolio diversified between several companies and sectors.

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Kevin Godbold has no position in any of 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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