UK inflation is currently about 3%. Today I’m looking at two small-cap dividend stocks whose payouts have risen by at least double this amount.

A mixed picture

International recruitment firm Empresaria Group (LSE: EMR) issued its 2017 results this morning. Sales rose by 32% to £357.1m last year, but much of this reflected pass-through wages of temporary workers. A more meaningful measure is net fee income, which rose by 18% to £69.4m.

According to the firm, net fee income has now risen for 18 consecutive quarters. Profits have also risen steadily in recent years. It said today that its adjusted pre-tax profit rose by 20% to £11m last year. However, the recruiter’s statutory pre-tax profit only rose by 3% to £8.1m.

As investors, I believe we need to understand the difference between the adjusted and statutory figures. But having taken a closer look, I’m satisfied that the adjusting items are either genuine exceptional costs or non-cash charges that can safely be ignored.

15% dividend growth

The good news for shareholders is that the firm’s dividend has been increased by 15% to 1.32p per share for 2017. Although this payout only gives a yield of 1.5%, the Crawley-based firm’s dividend has risen by an average of 26% per year since 2011.

Today’s dividend increase was ahead of consensus forecasts, so expectations for the year might also be increased. As things stand, the shares trade on a 2018 forecast P/E of 7.6 with a prospective yield of at least 1.5%. Although low P/E ratings are the norm in the recruitment sector, I believe this stock might offer reasonable value at this level.

A better choice?

Shares of Midwich Group (LSE: MIDW) have risen by 135% since the group’s flotation in 2016. This company is a distributor of audio-visual equipment and document management solutions to trade customers.

The group has around 13,000 direct customers as well as relationships with 330 vendors, who resell the products to their own customers. About 60% of sales come from the UK, with the rest coming from continental Europe and Australasia.

A year of rapid growth

Yesterday’s full-year results show that 2017 was another strong year of growth. Sales rose by 27.5% to £471.9m, while adjusted pre-tax profit climbed 35.7% to £24.3m.

The dividend was increased by 36% on a like-for-like basis to 13.8p, giving the stock a yield of 2.5%.

Companies with rapid dividend growth tend to have lower yields than those with slow-growing payouts. Over time, I expect Midwich to follow this pattern too, offering a higher yield with lower growth.

2018 is expected to be another year of strong growth, with analysts pencilling in earnings per share growth of almost 50% and dividend growth of around 10%.

The stock trades on a forecast P/E of 21, so a lot of growth is already in the price. But if you’re keen on this sector and believe Midwich can continue to expand, these shares could be a good buy at current levels.

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Confidence dented

I was bullish on Empresaria in an article in October. Management had said in the group’s half-year results that it was “confident” of meeting full-year market expectations. Forecast earnings of 13.9p a share put it on a very cheap price-to-earnings (P/E) ratio of 9.1. And with the group also being nicely diversified by recruitment sector and geography, I rated the shares a ‘buy’ at 127p.

My confidence (and that of management) proved misplaced, because the shares dived over 20% on 21 November when the company issued a profit warning. It advised that while it still expected to post a record profit for the year, it would be lower than anticipated. It said this was primarily due to reduced margins in Germany following changes to temporary worker legislation, and a continuing weak market in the Middle East, resulting in additional costs for resizing that business.

Considerable scope for growth

Today’s update on the full-year outturn has received a more positive response from the market, with the shares up 6% to 107.5p, as I’m writing. The company said it has worked to minimise the impact of the legislation in Germany and that resizing the Middle East business has resulted in an improved performance. It advised that it expects to report a record adjusted profit before tax, up 20% year-on-year, and a 9% increase in diluted adjusted earnings per share. This would equate to 12.3p, giving a P/E of 8.7.

Diversified by geography and sector, and continuing to invest in its existing business and to identify complementary acquisitions, I believe this £53m cap AIM-listed company has considerable scope for growth in the years ahead. I continue to rate it a ‘buy’.

Major investment proposition

FTSE 250 firm Sirius Minerals is a fascinating investment proposition, as it develops its giant potash mine. It made good progress on meeting its 2017 milestones aside from a slight delay in preparations for shaft sinking, but management is “confident that this small loss of time will be recovered over the remainder of the project schedule.”

That schedule targets first production for 2021, with full volume of 20m tonnes a year being reached in 2027. A number of offtake agreements for its polyhalite product have already been struck at $150 per tonne. This implies revenue of $3bn a year at full production and an EBITDA profit of about $2.35bn at the mid-point of the margin range forecast by the company. I envisage a net debt/EBITDA ratio of two and an enterprise value/EBITDA multiple of 10 as reasonable. This would give a market cap of $18.8bn, compared with $1.4bn at today’s share price of 22.22p and current exchange rates.

Management is aiming to keep shareholder dilution to a minimum. Big share price gains and a potentially massive dividend yield (annually increasing over the mine’s 100-year life) could be on offer for investors today. I rate the stock a ‘buy’, accepting the various risks associated with such a project.

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Furthermore, a forecast dividend of 7.65p (covered a robust 2.8 times by forecast EPS) gives a juicy prospective yield of 4.6%. And, just for good measure, this £59m cap company has a strong balance sheet, having reported a net cash position of £6.1m at its last financial year-end of 30 June.

Dependent on H2 to meet expectations

Alumasc provides premium products and systems in high-growth niches in its principal market of UK construction. It’s also building export sales. These jumped to 17% of last year’s group revenue of £105m from 9% of £92m the year before.

The company today advised that against a background of relatively flat demand in the UK construction market, its like-for-like domestic revenues increased by 4% year to date. However, it also said that export sales “are lower than the prior year.“ It didn’t put a number on the decrease but said it reflected, “the later phasing of larger projects.”

Indeed, this was a theme in a number of areas of business across the group and we were told “financial performance is expected to have a greater weighting towards the second half than was the case last year.” The H1/H2 profit weighting was 45%/55% last year, so the current-year outturn is going to be very dependent indeed on a strong second half. In such situations, the risk of a profit warning is heightened.

Alumasc appears to be well managed and I like its focus on specialist segments and its international ambitions. Nevertheless, there’s no getting away from its exposure to the cyclical construction market and there are recent signs this is weakening in the UK. I will await the company’s second-half performance with interest, but I’m minded to avoid it right now.

Confident outlook

I’m rather more confident on the outlook for specialist staffing group Empresaria (LSE: EMR). Its shares are trading at 127p, as I’m writing, valuing it at £62m. A current-year EPS forecast of 13.9p puts the company on a P/E of 9.1 and this falls to 8.5 for 2018 on expectations of a rise in EPS to 15p. Dividend forecasts of 1.3p and 1.45p give yields of not much more than 1%, but with these payouts covered more than 10 times by forecast EPS, there is plenty of scope for substantial increases in coming years.

Of course, like the construction market, recruitment is also cyclical. However, Empresaria is nicely diversified by both sector and geography. Seven key sectors range from aviation services to healthcare, while the group operates in 20 countries around the world. The breakdown of last year’s £270m revenue was Continental Europe 34%, Asia Pacific 29%, UK 26% and Americas 11%.

The company is seeing good growth opportunities within its existing businesses and from potential complementary acquisitions. It said in its half-year results to 30 June that it’s “confident” of meeting full-year market expectations. As such, I rate the shares a ‘buy’.

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International stocks such as Unilever (LSE: ULVR) could therefore be a shrewd place to invest. While it operates in the UK, it has a diverse business model which could create favourable growth for its investors. It could even deliver a similar level of growth to another international stock which has been a five-bagger in the last five years.

Diverse operations

As well as having a large number of products in its stable, Unilever operates in a wide range of geographies. This means that it is not reliant on one particular country or region, which provides it with a significant advantage over UK-focused stocks during the Brexit process.

Furthermore, the company operates mostly in the emerging world. This is likely to be an exceptionally good place for consumer goods companies to do business, since demand for a range of items is forecast to increase in the long run. Rising wealth levels and an increasingly consumer-focused economy are set to dramatically increase sales of Unilever’s products, which could lead to similar gains for its bottom line.

Solid business

As well as its diverse operations, the company also has a sound strategy. It has been able to improve its margins in recent periods as it seeks to become more efficient. Further progress in this area may be ahead, while scope for price increases also remains high. Due to its strong customer loyalty, pricing power is significant, and this may help it to generate even higher sales growth in future.

With the company expected to increase its bottom line by 18% in the current year, it seems to offer strong growth potential at a time when many UK-focused stocks face uncertain outlooks. Its price-to-earnings growth (PEG) ratio of 1.2 suggests it is not too late to buy it, with significant capital growth a strong possibility over the long run.

Stunning performance

Also offering international diversification is staffing company Empresaria (LSE: EMR). It operates in 20 countries across the globe, with a significant exposure to the Asia Pacific region. It delivered record first-half performance, with its revenue increasing by 50% in constant currency. This means it has grown net fee income in 16 consecutive quarters, while it has been able to successfully integrate recent acquisitions.

Looking ahead, the company’s share price could climb further following its 400% rise in the last five years. It is forecast to deliver an increase in earnings of 22% this year, which puts it on a PEG ratio of only 0.4. With five consecutive years of double-digit earnings growth behind it, it appears to be a stable and consistent performer. With Brexit risks likely to build, Empresaria could be a surprisingly strong stock to own in future.

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The company reported net fee income (gross profit) 26% ahead of the same period last year, with the strongest trading being in the UK, Continental Europe and Asia Pacific regions. The board said: “The group remains on course to meet market expectations for the full year.”

Impressive growth

Empresaria was founded in 1996 and floated on AIM in 2004 with 19.9m shares in issue. The share count has increased to 49m, as the company has had a number of placings over the years to fund its international expansion and widen its sector expertise.

Despite the share dilution, it’s delivered impressive earnings-per-share (EPS) growth. The compound annual growth rate (CAGR) since flotation has been 19.5% and over the last five years it’s notched up 23.3%.

Ridiculously cheap

The performance of Empresaria’s shares has been less impressive. The CAGR since its 65p IPO works out at just 5.2%.

What’s happened is that the shares have de-rated. The price-to-earnings (P/E) ratio has fallen from 47 to 13.2. Furthermore, it drops to 10.8 on analysts’ forecasts of 22.2% EPS growth for the current year. And with the price-to-earnings growth (PEG) ratio of 0.5 being well below the fair value marker of one, the shares appear ridiculously cheap.

The reason may be that analysts are forecasting EPS growth for 2018 to fall to less than 5%. I haven’t been able to get my hands on broker notes on the company and I’m at a loss to understand why such an abrupt deceleration of EPS growth is forecast. It’s not a sector-wide phenomenon.

The only thing I can think of is that Empresaria’s management has given cautious guidance to analysts on an under-promise-and-over-deliver basis. If so, the shares could be a snip at their current price. I tentatively rate them a ‘buy’ but would suggest potential purchasers investigate further.

Bargain basement buy

FTSE SmallCap firm S & U (LSE: SUS) is another stock that appears ridiculously cheap, given both a record of strong growth and forecasts for it to continue for the foreseeable future.

In its latest results, the company reported a 17th successive year of record pre-tax profits at its Advantage Motor Finance business. The chairman of the sub-prime specialist commented: “Brexit, Trump and another record set of results from S & U, plus ça change.”

My immediate response to such smug trumpet blowing tends to be “uh-oh, pride cometh before a fall,” but in this case management’s confidence does appear to be justified.

However despite this, and City forecasts of mid-teens EPS growth this year and next, the shares are trading near a 52-week low at 1,931p. A P/E of 9.6 for the current year, falling to a mere 8.4 next year, PEG readouts of 0.6 for both years and a dividend yield of 5.4%, rising to 6%, combine to persuade me that the stock is a bargain-basement buy at the current price.

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Macfarlane Group

Packaging specialist Macfarlane Group (LSE: MACF) is a classic under-the-radar value stock in my opinion. Packaging may not be the sexiest investment theme in the world, but that doesn’t mean there aren’t sizeable returns on offer. Indeed, £87m market cap Macfarlane Group has delivered annualised total returns of a huge 32% over the last five years to its shareholders.

Revenue in the last five years has increased from £145m to £180m, and earnings in this time have grown from 3p to 4.6p, a compound annual growth rate (CAGR) of approximately 9%. City analysts expect earnings in FY2017 to continue moving higher, with consensus estimates of 6p per share suggesting earnings growth of a formidable 30% for the year.

However despite the fact that Macfarlane Group has strong momentum at present, the shares can be purchased very cheaply. Indeed, the stock trades on a forward looking P/E ratio of just 10.5 and an enterprise (EV) to sales ratio of around 0.58, low multiples for a company growing quickly. Throw in a dividend yield of approximately 3.1%, and Macfarlane Group appears to offer outstanding value. 

The company recently stated that it will continue to focus on opportunities in sectors with “strong growth prospects” and as a result, I can’t see shares in Macfarlane Group staying this cheap for much longer. 

Empresaria Group

Next up is little-known staffing and recruitment specialist Empresaria Group (LSE: EMR). The £69m market cap company operates a multi-branded business model, offering permanent, temporary and offshore recruitment services across six sectors and 20 countries. Empresaria shareholders have enjoyed a huge 600% rise in the share price since the start of 2013, but the company still appears to offer value to my mind.

Revenue grew 44% to £270m last year after the company made several key acquisitions, and analysts are forecasting a further revenue increase of 26% for FY2017. Furthermore, earnings per share have powered upwards at an annualised rate of around 24% over the last five years and are forecast to increase 22% this year. The company also has a large pile of cash on its balance sheet, with £18m in the bank at the end of 2016. However, despite these impressive numbers, Empresaria trades on a forward-looking P/E of just 10.1 and an EV-to-sales ratio of a low 0.32.

With only 32% of revenue last year coming from the UK, the company’s geographic diversification adds weight to the investment thesis. Furthermore, management appears to be bullish on future prospects, recently stating “we continue to see exciting growth opportunities to develop our group and deliver increased profits and we look to 2017 with confidence.” Therefore, given the low valuation of the shares, Empresaria looks to be an excellent value stock in my opinion.   

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While 15% of this gain was due to currency effects, today’s figures show how well WPP’s global portfolio of businesses is performing at the moment. In this article I’ll look more closely at WPP. And I’ll also consider the attractions of a much smaller — but still global — business.

Prepared for the big unknown

The one fact we can all be certain of is that we don’t know how Brexit will turn out, or what might change. Looked at this way, WPP’s recent statement that it intends to place “even greater emphasis” on its operations in Western Europe seems like a sensible way for boss Sir Martin Sorrell to hedge his bets.

Today’s statement suggests that WPP’s global profit engine is firing on all cylinders. WPP took the unusual step of stating key figures in three currencies, in order to show genuine underlying growth. Revenue for the first nine months of the year has risen by 15.8% to a bit over £10.1bn. Measured in US dollars, revenue was 5.0% higher, while in Euros it was up 4.7%. The only reported currency in which revenue fell was the Japanese Yen.

Profit margins are still rising, too. WPP’s operating margin for the first nine months of the year rose by 0.4% in reported currency (£) and by 0.3% excluding exchange rate movements.

WPP shares currently trade on a 2016 forecast P/E of 16, falling to a P/E of 14 for 2017. A dividend yield of 3.2% is expected this year, rising to 3.5% in 2017. In my view this valuation is probably about right for WPP, so I’d hold at current levels.

Faster growth elsewhere?

I rate WPP as a long-term income investment, but investors looking for growth may find that Empresaria (LSE: EMR) has more to offer. Although it’s a relatively small business, with a market cap of just £52.5m, this specialist recruitment group operates in 19 countries across Europe, the Americas and Asia.

During the first half of this year, Empresaria earned roughly 30% of its net fee income in each of the UK, continental Europe and Asia Pacific. The remainder came from the Americas, which is a newer but fast-growing region for the group.

Empresaria’s diversified strategy has helped the group to deliver twelve straight quarters of underlying net fee income growth. Measured against this track record, I think the shares look good value on a 2016 forecast P/E of 9.6, falling to 7.5 in 2017.

The firm’s dividends are of limited appeal, as Empresaria’s forecast yield for this year is just 1%. Although the group generates consistent free cash flow, much of this seems to have been used to fund acquisitions, rather than for dividends. This approach has kept net debt low and helped earnings grow from 5.3p in 2013 to a forecast level of 11.1p per share this year.

Based on this track record, I’m happy to trust that Empresaria’s management will continue to deploy their capital wisely, and reward shareholders through rising earnings. In my view, Empresaria could be a good growth buy at current levels.

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Will there be more to come in 2016, or is it time to take profits?

Empresaria Group

Shares in Empresaria Group (LSE: EMR) have risen by 135% so far in 2015. This AIM-listed small cap recruitment firm operates in the UK, Finland and Germany, plus a wide range of Asian and Middle Eastern markets.

Happily for investors, Empresaria’s focus on sectors such as finance, IT and retail means it is not heavily exposed to the oil market. Earnings per share are expected to be around 17% higher this year than in 2014.

Empresaria recently acquired a US healthcare recruitment group for $12.1m and earnings per share are expected to rise by another 14% to 10.1p in 2016. This puts Empresaria shares on an undemanding forecast P/E of 10.5.

Further gains appear possible in 2016, but I would caution that recruitment tends to be a cyclical business, so sharp downturns are also possible. The dividend yield is also less than 1%, so Empresaria isn’t a stock for income hunters.

Pantheon Resources

US-based oil and gas explorer Pantheon Resources (LSE: PANR) is definitely not a stock for widows and orphans.

The shares have risen by a whopping 435% to 86p this year, thanks mainly to the success of the VOBM#1 well in Texas. Pantheon has a 50% stake in this well, which produced 1,500 barrels of oil equivalent per day when put onto test recently.

Pantheon’s share price doubled in just a few days following news of this discovery, and has since gone on to make new highs. The only problem is that Pantheon’s second well, VOS#1, isn’t going so smoothly.

VOS#1 has encountered an unexpected oil and gas bearing zone at 12,600ft. Although this sounds like good news, it isn’t the target for the well and has required additional work to enable the firm to carry on drilling. There’s no indication yet of whether this find will be commercially viable and drilling costs could now be much higher than expected.

Pantheon shares now trade on 7.6 times their net asset value. If VOS#1 is anything other than a blockbuster success, this stock could fall sharply.

In my view, now might be a good time for investors to take some profits on this adrenalin-fuelled stock.

Redde

Redde (LSE: REDD) provides claims management and related services for the motor insurance industry. The group’s share price has risen by 85% this year. Earnings per share rose by 19% for the year ending in June and are expected to rise by another 11% in the current year.

One of the firm’s main attractions for investors is its 5% dividend yield, which appears to be covered by both earnings and free cash flow. Although Redde shares trade on a demanding 2015/16 forecast P/E of 20, the firm’s high yield and net cash balance of £39m do look attractive to me.

If earnings continue to rise and remain backed by free cash flow, then further gains could well be possible next year. Having said that, I’d expect a more modest improvement than we’ve seen this year, as earnings growth does appear to be slowing.

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