Some of the more commonly cited benefits of ASX small-cap investing include access to emerging companies, greater diversity in company types, and opportunities for capital growth. It is less common to hear about the significant income that small caps can pay.
We recently asked three leading managers with expertise in small-cap income to show us how they screen stocks outside the ASX 50 to first build a shortlist, and to then identify some of the red flags they look for. In this wire, they put it all into practice and nominate their top picks.
Read on for responses from Jack Collopy from Perpetual Investments; Marc Whittaker from Investors Mutual and Matt Williams from Airlie Funds Management, and to hear their pick of the ASX small-cap income stocks.
Matt Williams, Airlie Funds Management
Smartgroup (SIQ): Yield 4%, ff (with potential for a special dividend)
Despite being exposed to the cyclical element of new car sales, the long term management team have skillfully increased market share organically and via acquisition over a long period of time – fantastic track record.
Bapcor (BAP): Yield 2.6% ff
This may not be an exciting headline dividend but was struck off a low 50% payout with double-digit CAGR over the last 3 and 5 years. The business should be reasonably steady with a strong share in a mostly duopoly market (Repco), supplying spare parts and car consumables to independent workshops. Management have skillfully grown via acquisition, but this is also a risk.
Mineral Resources (MIN): Yield 4.9% ff
This share price can be a wild ride - lately driven by lithium and iron prices. But within those volatile businesses is the very steady mining service business (crushing) that should allow a solid ongoing dividend payment. This is one of the few good quality stocks in the market trading closer to its 52 week low, rather than its 52 week high.
Nib (NHF) Yield 3.2% ff
Despite the ever-present regulatory threat, the industry remains well placed to slowly grow dividends driven by premium increases; better claims management; and expense efficiencies. NB: We actually prefer MPL currently with a dividend yield of 4% ff but the market cap is over >$5bn, which was the cut-off for this article.
Centuria Industrial REIT (CIP) Yield 5.7% uf
Well managed pure-play industrial portfolio. Yield higher than sector average. Acquisitive, so always a chance company raises more capital.
Viva Energy REIT (VVR) Yield 5.1% uf
Viva is a petrol stations landlord with attractive triple net leases growing ~3% p.a. Acquisitive, so always a chance company raises more capital.
So, the average gross yield on this basket of stocks is 5.3%. Risk of capital loss can’t be blended away, but I think the process we’ve taken above has delivered good quality companies, and hopefully a higher probability of doing better than the market averages in falling markets - whilst paying a reasonable (and growing) dividend stream.
Jack Collopy, Perpetual Investments
Elanor Investments (ENN): Yield 7.5%
Elanor is a property and funds management business run by a highly competent management team. The company has grown funds under management from $86m in 2014 to $1.4 billion today and we believe there is plenty more to go. Management are excellent at finding undervalued property assets and we back them to continue doing so. The stock today trades at around 12x P/E and offers a healthy dividend yield of 7.5%.
Pacific Current (PAC): Yield 5.5%
This is a boutique fund manager and still very much under the radar for most. This is a rare example of a company with strong growth characteristics (we forecast close to 50% EPS growth this year), a conservative balance sheet (no debt), a healthy yield (5.5%) and a very attractive valuation (it trades on just 11x P/E).
Shaver Shop (SSG): Yield 7%
Shaver Shop owns its niche as Australia’s leading personal grooming retailer. The business is outperforming in a challenging retail environment and offers a healthy level of growth ahead via continued store rollout and a strong online sales strategy. The company is conservatively geared and trades at an attractive 10x P/E with a 7% dividend yield.
Marc Whittaker, Investors Mutual
Events Hospitality and Entertainment (EVT): Yield: 4.1%
Event owns two substantial businesses – cinemas and hotels.
Its cinema business in Australia and New Zealand is made up of Event and Greater Union cinemas, its GU Filmhouse for smaller, arthouse audiences, as well as its cinema technology supply business, Edge. Event also operates Moonlight open-air cinemas across Australia and Sydney’s iconic State Theatre.
Its Australian hotel business consists of QT Hotels & Resorts, Rydges, Atura Hotels and Thredbo Alpine Resort.
The company’s valuation is underpinned by a significant and strategic property portfolio. The company also maintains a conservative balance sheet that may be strengthened further through the proposed sale of its German cinema assets. The company offers a fully franked 4.1% yield at current prices.
Events is led by a relatively new and capable management team, who is leading innovation in formats and product development. The new arthouse hotel offering QT Hotels is an example of a new and innovative format that is outperforming in terms of occupancy and room rates in what is a softer hotel market.
A2B (A2B): Yield 5.5%
A2B (previously known as Cabcharge) is a payments platform provider and operator of taxi networks – that also represents a high-quality income stock.
While the company continues to reinvest significantly into its customer and technology offerings, it continues to generate strong free cash flow, it holds a net cash balance sheet and given the relatively low payout ratio of 60%, has the capacity to continue to grow its dividend over time. The company is also attractively priced, trading on a fiscal 2020e earnings multiple of 13x and a yield of 5.5%.
Over the last few years, in the face of intense competition from other ride-sharing providers, A2b made the decision to increase its investment in technology, marketing and fleet. The business continues to face a dynamic operating environment, but the strategy of Management and the Board now has the company better positioned, with a return to growth envisaged in its Service and Network businesses. Given this, we see the company growing earnings – and dividends – over time.
While small caps are known for their capital growth, if you know where to look, some provide a reasonable and reliable dividend as well.
For example, one of the richer dividend yields here is Shaver Shop at 7.0%, which has also seen its share price gain 51.7% over the last 12 months. The highest yield was Elanor Investments at 7.5%, the share price of which has jumped more than 20% year to date.
Looking at the full list, the average yield quoted by the managers is 5.0% (with most of them fully franked). And while three of the stocks have lost ground over the last 12 months (A2B -25.8%; MIN: -5.6%; EVT: -2.5%), on average, the group has tracked higher and the share prices have gained 13.4% on average.
Capital growth AND income... like the old el Paso girl said, 'Why don't we have both'!
If you enjoyed this take a look at the process the managers use to screen stocks outside the ASX 50 and then some of the red flags that can knock a stock off the shortlist. Please hit FOLLOW to be the first to get my next wire.