Renold

Renold (LSE:RNO) manufactures chains, gears and couplings for a variety of industries. They carry ore out of mines, make conveyor belts move, and drive the wheels on subway trains, among other things.

Today, the firm’s shares look cheap, trading on a forward price-to-earnings (P/E) ratio of 7.7 times. This in part reflects uncertainty in key sectors such as manufacturing, construction and mining.

Yet Renold’s ongoing resilience suggests this low valuation may be unjustified. Revenues at constant currencies rose 0.6% in the six months to September, while order intake rose 11.5% year on year.

This is impressive, as is the firm’s ongoing work to boost margins. Efficiency measures helped push adjusted operating profit 4% higher in the first half.

Renold does have £42.2m of net debt that investors should bear in mind. Still, the company’s recent decision to reinstate dividends is a good sign that this is manageable.

Character Group

Character Group‘s (LSE:CCT) a rare commodity in the realm of small-cap stocks. This is because most smaller growth shares reinvest any spare cash they have as they chase future profits.

However, Character has a decent history of returning money to its shareholders with dividends. It’s a record City analysts expect to continue, so the forward dividend yield here’s an impressive 6.8%.

The business manufactures a wide range of toys and games. So unfortunately this leaves it at the mercy of interest rate movements in the coming year and their impact on consumer spending. Latest financials showed sales fall fractionally in the six months to February, to £54.6m, as consumer spending remained under pressure.

But with inflation moderating and the Bank of England signalling more rate cuts, revenues could rebound. And this could reinvigorate its share price following recent pressure.

A modest forward P/E ratio of 9.8 times leaves scope for a price rebound too.

Ramsdens Holdings

Pawnbroker Ramsdens Holdings (LSE:RFX) is another low-cost, dividend-paying small-cap share I believe’s worth considering today.

It trades on a forward P/E ratio of 9.3 times. Meanwhile, its corresponding dividend yield’s 4.8%.

To put that — along with Character Group’s yield — into context, the average dividend yield for FTSE 100 shares is way back at 3.6%.

Pawnbroking companies are thriving in this tough economic climate. Ramsdens, for instance, is expected to have generated record profits in the last financial year (to September). With the cost-of-living crisis persisting, City brokers expect new all-time highs to be reached this year too, as people rush to raise cash.

Ramsdens’ bottom line should also benefit from ongoing estate expansion. Today, it operates 169 stores, up from 161 a year ago.

Earnings will suffer if gold prices continue their recent descent. But on balance, I think this small-cap star looks in great shape.

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To me, this bull market has the smell and feel of one that may take years to fully play out rather than mere weeks and months.

I’m fully invested right now. But opportunities keep popping up. For example, I’ve found a UK small-cap stock that has the potential to help drive gains in a portfolio because of earnings growth in the underlying business.

Positive expectations are never guaranteed to materialise, of course. Businesses can suffer setbacks and challenges at any time. However, investors focused on the long haul probably have the best chance of giving their stocks time to perform as the underlying businesses hopefully expand.

Enthusiastic customers

The company in question is Character (LSE: CCT), and it designs, manufactures and distributes a range of toys, games and playthings.

However, to begin, let me lay on the table the risks this business faces. Perhaps the biggest is that it may misjudge the market for toys and its creations then fail to sell. Another is the fierce cyclicality in the sector. On top of that, it’s not the only toy maker around, so competition from other businesses could eat into the firm’s market share.

The financial and trading record shows a lot of earning volatility and wild swings in the share price:

However, there’s opportunity as well as threat in the way the stock and the business behaves. Right now, they both seem to be near the bottom of a cycle, so we could see a rebound higher soon.

One thing I like that anchors the value here is the net cash position on the balance sheet. Cyclical outfits with net cash rather than net debt are often in a strong position for their next growth spurt.

On 9 May, with the half-year results report, the company delivered an optimistic outlook statement. The directors said they are “encouraged” by the enthusiasm customers are showing for the firm’s product portfolio after the launch of the spring/summer catalogue.

Dividends and growth potential

Looking ahead, the company expects to maintain its market share in domestic territories and increase international sales, “particularly” in the US.

Meanwhile, City analysts expect a rebound in normalised earnings upwards of 45% for the current trading year to August 2024.

Set against that expectation, and with the share price near 330p, the forward-looking price-to-earnings (P/E) ratio is just below 13. That compares to the rating of the FTSE All-Share index near 12.5.

I don’t think that’s an outrageous valuation, especially if the business is entering an enduring growth phase.

However, the icing on the cake is the dividend. The yield is running at about 5.7% for this year That suggests handy income for investors to collect while waiting for further growth to materialise.

My plan here would be to dig in with thorough research and consider buying the stock to add to my diversified portfolio when I have more funds to invest.

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Toy maker

Character Group is a toy, games, and gift ware designer and developer. Character is responsible for much loved children’s characters such as Peppa Pig, Teletubbies, and Postman Pat to name a few.

As I write, Character shares are trading for 620p, compared to this time last year when shares were trading for 425p. This equates to a 45% return over a 12-month period. More recently, the shares have been on an upward trajectory since October after a small dip in share price. The shares are up over 30% since October at current levels.

A FTSE growth option

Character operates in an inelastic market. General economic conditions tend not to affect the toy and games market. With this quality, and the fact it pays a dividend, it could be seen as an attractive option for my portfolio. I think the shares could rise further as 2022 develops.

Next, Character’s performance and growth has been consistent recently and historically. I do understand past performance is not a guarantee of any future performance but I like to use it as a gauge when determining investment viability. Character released its most recent full-year results for the year ending 31 August 2021 in December. Character confirmed revenue, profit, EBITDA, net cash, and dividends increased compared to 2020 levels. Character’s dividend yield currently stands at just under 3%, which is enticing for a FTSE AIM incumbent. Historic performance shows me prior to 2020, Character was able to grow revenue year on year before the pandemic affected performance slightly. 2021 levels have surpassed pre-pandemic performance, which is encouraging.

Finally, Character’s products are being recognised as some of the best in the market. This was highlighted when two of the company’s toys were recognised in the best toys wish list of the year in September. This is a list compiled by the Toy Retailers Association (TRA) each year.

Risks and verdict

Character is not averse from risks that could derail progress. Firstly, competition in the toy and games market is more intense than ever. The market is growing and children are becoming more savvy therefore firms are looking for the next big toy or game to increase performance and boost financials. Secondly, despite operating in an inelastic market, factors such as supply chain issues and rising costs could still affect Character’s bottom line. Any decline in performance could lead to dividend cancellation, as dividends aren’t guaranteed.

Overall I am bullish towards Character Group shares right now. I believe they could see excellent growth in the year ahead and beyond and I would add shares to my holdings at current levels. Character is an FTSE AIM stock that pays a consistent dividend with an enticing yield and has well respected and recognised products. I think the shares look cheap right now too with a price-to-earnings ratio of just 11.

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In early August CEO, Kevin Rountree and Finance Director Rachel Tongue won bonus share awards for recent performance. Top brass at the Nottingham HQ are clearly pleased with the way business is going, but is the stock overvalued or is now a true entry point for value investors?

Buy in time?

City analysts suggest a forward P/E ratio of around 22, meaning investors will pay 22 times future earnings for £1 of profit. If that seems rather high, you may consider that 2019 results for the year ending 2 June beat expectations once again, with pre-tax profits rocketing 9.4% to £81.2m and a sales hike of 15.9%.

The group carries very little debt and has not added any in the last five years. That takes pressure off the FTSE 250 firm’s profit margins and says to me a higher P/E ratio is justified.

Earnings per share jumped from 184.3p in 2018 to 202.9p in 2019 and the full-year dividend was up by almost 25%.

An upcoming ex-dividend date of 8 August gives the canny investor two days to jump in and reap 30p per share (as long as you buy before the ex-dividend date, you can sell it on at any point after that date and still get the dividend).

Marching orders

Sometimes in all the talk of ratios and profit modelling we forget to look at what a business actually makes. Games Workshop’s main product line, Warhammer, is without peer.

When you’ve graduated from Dungeons & Dragons and want to take it a step further, you start building armies. And I believe Games Workshop’s generals have the foresight to take the company further.

Greater expansion across Europe is on the cards, with the group hiring development managers for France, Germany and the Czech Republic. Overseas growth will add some exposure to the euro and so may drive up costs, but I still rate this stock.

Strong Character

If GAW’s P/E ratio makes you hesitant, toymaker Character Group (LSE:CCT) may be one for your watch list. The rights owner for wildly popular children’s brands Peppa Pig and Ben & Holly had a dividend yield of 4.4% last year, inclining up towards 5% next year, and it reported rising revenues in H1.

Operating profits were up £1.3m to £5.9m and pre-tax profits hit £5.6m against £4.5m a year earlier.

As any exasperated parent could tell you, being forced by kids to rewatch the same programme over and over again is a pain. But it clearly adds to the company’s bottom line. And wider rights ownership of trending toys and games like Pokemon and Treasure X are a boon to investors.

Currently trading at a P/E of 8.8 with earnings expected to fall by around 3% next year before recovering in 2020, one other thing to consider is the company’s fortunes in North America. Directors said sales there “continue to be challenging” after the collapse of Toys R Us in 2018.

But I still think it is undervalued, considering expected revenue growth of 7.6% means it would outpace the wider market.

The £119m market cap AIM-listed stock has declining debt levels while cash reserves are heading up. That looks like good management to me.

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If highly-valued equities miss expectations, the resulting exodus of investors can cause the share price to crash.

With this being the case, when I look at shares in Morrisons (LSE: MRW), I’m immediately put off the business due to its high valuation. 

Overpriced 

At the time of writing, shares in the retailer are trading at a forward P/E of 17.1, which is what I would consider a premium growth multiple. Only double-digit earnings growth would justify this valuation in my opinion. However, the City is forecasting a slight decline in earnings per share for fiscal 2019.

Not only does the share price look expensive compared to its growth potential, but the stock is also dealing at a premium to peers.

Shares in Tesco, for example, are changing hands at a forward P/E of 15.7. I would argue that it deserves a premium valuation over the Morrisons share price because not only is the company significantly bigger, it is also forecast to report earnings per share growth of 27% for fiscal 2019 and 21% for fiscal 2020 eclipsing Morrisons’ meagre growth.

The one advantage the Morrisons share price does have over its larger peer is a more attractive dividend yield of 3.9%, but in my opinion, this is not enough to justify the high valuation premium.

Overall, I would avoid the Morrisons share price for the time being on valuation grounds and buy toymaker Character Group (LSE: CCT) instead.

Remarkable business 

To me, Character immediately stands out as a high-quality business. Revenue has grown at a steady rate of 10% per annum for the past six years, and operating profit has exploded from just £7.5m in 2014 to £11.7m for 2018. Return on capital employed — a measure of profit for every £1 invested in the business — hit 37% in the company’s last financial year, putting it in the top 5% of the most profitable companies listed in London.

Over the past 24 months, Character has faced some significant headwinds, such as the collapse of toys retailer Toys R Us — a major customer — and the general UK retailing environment. 

Nevertheless, despite these challenges, the company has continued to push ahead. In its post-Christmas trading update, the group informed investors that products continue to sell well throughout the Christmas period and every region the business sells to is seeing growth, apart from the USA. 

With this being the case, it looks as if the business is firmly on track to meet City growth forecasts for the year. Analysts have pencilled in earnings per share of 47.6p, which implies the stock is trading at a P/E of 11.3 currently. 

For such a profitable company, I think this modest valuation undervalues Character. As a bonus, there is also a dividend yield of 4.7% on offer. Overall, this remarkable firm looks to me to be a much better buy than the Morrisons share price.

The post Why I would sell the Morrisons share price and buy this remarkable toymaker instead appeared first on The Motley Fool UK.

Given the faddish vagaries of kids’ tastes, my instinct is to keep away from such stocks. But Character does seem to be very successful at it, and right now it has Doctor Who offerings, Pokemon action figures, Peppa Pig, Fireman Sam… and a whole host of other desirable properties.

Character Group shares have been flat recently, but have soared by nearly 180% over five years. Most of that gain came in 2014 and 2015, but the intermittent nature of the toys and games market does mean we should expect volatility. And if you can handle that over the short term then I do think I’m seeing an attractive long-term investment here.

Growing dividends

We’ve also seen a rapidly rising dividend over that period, and the year to August 2018 brought in a yield of 4.5%. I see that trend continuing too, and forecasts already suggest a yield of 4.8% for next year.

Character’s year was shaken by the failure of Toys R Us, which contributed to a 7.9% revenue fall to £106.2m, with pre-tax profit dropping 13% to £11.6m. But I was cheered by a strengthening gross margin, up from 32.6% to 34.2%, which impresses me in such a fiercely competitive retail market.

Net cash increased from £11.5m to £15.6m too, and to me, Character’s balance sheet looks better than I’d expect for a company whose shares are trading on a P/E of only around 10. I see a long-term cash generator here which should be able to keep those dividends flowing.

Recovery candidate

Dixons Carphone (LSE: DC) typically enjoys good trading over the festive season with mobile phones being on so many people’s Christmas lists. But the past year has not been kind, as a tough retail environment coupled with increasing levels of credit exposure risk have taken their toll. 

As a result, the shares are down 20% since the beginning of 2018 — and they’ve shed 68% since Christmas 2015.

But I can’t help feeling there’s far more pessimism built in to today’s share price than is actually warranted, and I reckon I’m seeing a contrarian recovery bargain here.

Yes, there’s a 22% fall in EPS suggested by the market’s analysts for the year to April 2019. But that would put the shares on a P/E of a mere eight, and I see that as an overreaction on at least two counts.

Big yields

One is that dividends, while expected to remain flat over the next couple of years, would yield close to 7% now that the share price has crumbled — and they’d be covered 1.8 times by earnings.

The other is that Dixons Carphone is strongly cash generative, with free cash flow of £172m last year, and isn’t shouldering too much net debt at £249m (down £22m from the previous year). That net debt figure comes in well below the year’s £382m headline pre-tax profit.

The balance sheet is surely not going to look as good this year, but I see plenty of safety margin — and if the dividend is maintained, I can see the share price bouncing back.

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One company that ticks this box, in my opinion, is — somewhat ironically — XPS Pensions (LSE: XPS). With a market capitalisation of £340m, it’s hardly a minnow but I’d be surprised if it were currently appearing on many income investors’ radars.

Formerly known as Xafinity, the Reading-based firm’s purchase of Punter Southall earlier in the year created the largest specialist pensions business in the UK. It currently advises over 1,200 schemes and administers pensions for over 800,000 people.

Today’s interim results for the six months ended 30 September contained few surprises, which is probably just what holders would hope for.

Revenue rose 113% to £52.2m supported by the integration of Punter Southall (which contributed £26.7m). Although operating profit plummeted from £4.2m to £100,000 due to charges relating to the deal, adjusted operating profit, which strips out these costs, rocketed 63% to £11.4m.

Away from the numbers, XPS stated that it had seen “good client retention” over the period in addition to a number of new annuity wins. Looking forward, it stated that a favourable market backdrop should allow the company to recapture revenue growth over the second half of its financial year. Management now expects full-year profit to be “broadly in line with expectations”.  

Changing hands for 16 times earnings, XPS is on the pricey side, but some of this can be justified by the fact that demand for its services is unlikely to dry up anytime soon. Indeed, co-CEO Paul Cuff commented today on the “significant growth opportunities” that lie ahead for the company as a result of “an increasingly positive regulatory background“. 

But XPS is, I think, a decent option for income seekers too. As well as hiking its half-year payout by 10% to 2.3p per share today, the business is forecast to return a total of 6.85p in the current financial year, equivalent to a yield of 4.2%. 

Plenty of character

Another company that arguably doesn’t generate much press, but I think is a great source of dividends, is small-cap toy designer, developer and distributor Character Group (LSE: CCT). 

Despite the closure of Toys R Us hitting its performance in H1, today’s full-year results were cheered by the market as the company reported “comfortably achieving market expectations” and finishing the financial year “in a strong position“. Product ranges such as Peppa Pig and Teletubbies “remained in demand“, even though revenue and pre-tax profit at the £105m cap declined by 8% and 14% respectively over the year to the end of August. 

Encouragingly, Character stated that new financial year had started well and that it was “confident” on trading over Autumn and Winter which, of course, includes the particularly crucial festive period. As a further sign of this bullishness, the company raised its final dividend by 20% today, bringing the total cash return to 23p per share (a yield of 4.5% at the current share price of 513p).

With payouts comfortably covered by profits, not to mention a solid £15.6m net cash on the balance sheet, I wouldn’t be surprised if Character’s trend of raising dividends by double-digits over the last few years continues going forward.

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While that’s come to pass, sentiment towards the housing sector has also been shaken by Brexit fears, and the Persimmon share price has declined by 23% since June’s peak. Comments from Bank of England governor Mark Carney haven’t helped, after he reportedly suggested that house prices could fall by around a third should we face a disorderly exit from the European Union.

That was a worst-case scenario, but it’s the kind of thing that can seriously raise uncertainty — and uncertainty causes share prices to wobble.

Warning

A profit warning from Crest Nicholson this week further shook the sector, with the typical second-half pick-up in demand for homes in London and the South of the country appearing not to have materialised this year. But I agree with fellow Fool Peter Stephens’ suggestion that Crest Nicholson has a significant safety buffer, and I don’t see its dividend as coming under any real pressure.

I think the same is true at Persimmon, which is awash with surplus capital — so much that, with special dividends included, forecasts are suggesting total dividend yields for this year and next of better than 10%. With forward P/E multiples of around eight, I see a safety margin here too.

Still, while Brexit negotiations continue with their appearance of stumbling from one obstacle to another on a daily basis, I can see house-builder price weakness continuing — and it could carry on for some time. But to me that suggests possibly better buying opportunities.

Overlooked star?

If forecasts prove accurate, the dividend from Character Group (LSE: CCT) will have more than trebled in five years — from 7.25p in 2014 to 23p in 2019. That suggests yields of 4.4% this year and 4.8% next, and with the shares on P/E multiples expected to drop to 10 by 2019, I’m wondering why the market isn’t more interested. 

I’m guessing it’s the 10% EPS drop predicted for this year that’s putting people off, after several years of solid growth, but I’m thinking a 19% rebound indicated for 2019 could quickly restore a bit of bullish sentiment.

At 500p, the share price is just about unchanged over the past three years, though with a few ups and downs along the way. That’s after 2015’s massive rise following on from the company’s recovery, and it highlights what I see as Character Group’s biggest weakness — its fortunes are governed by the toys and games market, which is greatly at the whim of each year’s fads and fashions.

Strong progress

A trading update last month was upbeat, with the company speaking of “strong demand for our core ranges and new introductions,” and expressing confidence in its prospects for the all-important Christmas season.

On Thursday the firm reported the acquisition of a 55% holding in Proxy, a Danish toy distributor, with the total payable being subject to future performance. The company says this should “potentially enable frictionless access to EU markets post-Brexit,” which is certainly an important consideration.

I see Character Group as tempting.

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I would be happy to buy HSBC for its dividend income. But I wouldn’t expect big gains from a bank that’s already valued at £133bn and trades at a small premium to its book value.

Another concern is that although banks’ balance sheets appear to be much stronger than they were before the financial crisis, the market remains unconvinced. Banking stocks have headed steadily lower this year, despite rising profits. I think there’s a risk that total shareholder returns from this sector could lag the wider market for some time yet.

For this reason, I’m starting to focus my attention on finding opportunities among small-cap stocks, which may have the potential to deliver much bigger gains.

Profit from play

One stock I hope to add to my own portfolio in the next few weeks is toy manufacturer Character Group (LSE: CCT). This company specialises in producing toys based on television, film and game franchises such as Peppa Pig, Dr Who, Pokémon and Minecraft.

The business was hit by the failure of Toys R Us, but things now seen to be getting back on track. According to the firm, trading during the second half of the year to 31 August showed “a return to its previous growth pattern”. Management is confident that profits for the year will “comfortably reach market expectations”.

We can see what these are by checking broker consensus forecasts, which show adjusted earnings of 39p per share this year, with an expected dividend of 21p. These numbers put the stock on a forecast P/E of 12.9 with a prospective yield of 4.2%.

That looks like a good entry point to me for this company, which generated a stunning return on capital employed of 50% last year. I rate these shares as a buy.

A deep value bargain?

My final stock is Barbados-based luxury resort operator Elegant Hotels Group (LSE: EHG). Shares in this firm have fallen by about 25% so far this year. The decline seems to have been triggered by news of a 23% fall in adjusted pre-tax profit for 2017, followed by a dividend cut.

However, the shares are up by 5% at the time of writing following a positive trading update. The company says that bookings for next year are currently “ahead of the same period last year”.

Management also notes that recent tourist taxes implemented on flights and hotel stays in Barbados have not yet had a material impact on profits.

At the last-seen price of about 69p, Elegant shares offer a forecast dividend yield of 4.6% and trade at a discount of about 30% to their tangible net asset value of c.100p per share.

Analysts expect the group’s earnings to rise by 7% to 8.7p per share next year, putting the stock on a modest P/E of 7.5. It’s also worth noting that the company received an (unsuccessful) takeover approach in December 2017.

In my view, Elegant looks attractive as an income buy and a potential bid target. I’ve added the shares to my watch list for further research.

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Today, I’m taking a look at three less-well-known stocks, all of whom provide a great source of income to their owners at the current time.

Under the radar

Small-cap ceramic tableware, cookware, giftware and tabletop accessory provider Portmeirion Group (LSE: PMP) might not raise pulses, but it’s done no harm at all to the wealth of its owners. Those who purchased the stock just one year ago would now be sitting on a 26% capital gain. 

Having delivered a “strong first half trading performance” — during which revenue and pre-tax profit grew by 11.4% and 29.1%, respectively — it looks likely this positive momentum will continue.

But Portmeirion is also no slouch when it comes to returning cash to its owners. While the forecast 3.3% yield for 2019 isn’t the biggest, it’s worth highlighting that the business boasts a solid history of hiking its payouts. As seasoned Fools will know, a consistently rising dividend is usually preferable to a large but stagnant one.

At 16 times forecast earnings, Portmeirion isn’t cheap, but returns on capital are invariably high, its finances look sound, and the decision to diversify into new markets should mean it continues growing. One to capture on general market sell-offs, perhaps. 

Next up is fellow AIM-listed stock Character (LSE: CCT) — a designer and distributor of toys for a number of established brands including Peppa Pig and Teletubbies.

Earlier this month, the market minnow released a reassuring trading update in which it highlighted “a return to its previous growth pattern during the second half.” Having recovered quickly from the administration of Toys R Us (a big customer), sales in the UK are at record levels, allowing the company to state that it will “comfortably reach market expectations” for the full year. 

Like Portmeirion, Character also generates high returns on the capital it invests. Unlike Portmeirion, its stock is on sale for a more-than-palatable 10 times forecast earnings. For those who dislike firms loaded with debt, the £110m-cap boasts a net cash position. 

Character’s shares come with a fairly tasty forecast 4.5% yield at the current share price. With a habit of raising dividends by double-digit percentages, I suspect it will continue to be a reliable source of income going forward. 

A final stock that would likely pass many dividend hunters by is supply chain solutions provider Wincanton (LSE: WIN). 

Never one to shout from the rooftops, things have been fairly quiet on the news front since the company last reported on trading in late June. Back then, it was revealed that the £278m-cap continued to perform in line with expectations, with a new contract win with EDF Energy complementing a number of renewals.

While the business appears to be ticking along nicely, it’s the dividend stream I like most.

Wincanton is likely to return 10.5p per share this year — equating to an attractive 4.7% yield at its current share price. Having now resolved issues relating to its pension fund, there appears to be little preventing management from increasing payouts in the future.

The stock currently trades on an inviting price-to-earnings (P/E) ratio of 7 for the year ending 31 March. 

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