Investors looking for long-term holdings are highly unlikely to think of Dixons Carphone (LSE: DC), but against all odds the high street electronics retailer continues to post sales, earnings and dividend increases year after year. And with the company’s shares trading at just 10.5 times forward earnings while offering a 3.2% yield, I reckon now is a perfect opportunity to take a closer look at this value stock.
The company’s final results for the fiscal year to April showed a 9% year-on-year rise in revenue driven by strong like-for-like sales growth of 4% and the positive effects of the weak pound on overseas earnings.
Of course, for major importers such as Dixons, the weak pound can cut both ways as it also increases the cost of importing its electronic goods from overseas. Worries about the detrimental effects of this inflation on the group’s profits and what was expected to be a weakening of consumer confidence following Brexit are the primary causes for the company’s shares’ low valuation.
Yet in the year to April, the company showed little sign of either of these issues knocking profits. Gross margins remained stable year-on-year and the company even upped its lower-end pre-tax profit guidance from £475m-£495m to £480m-£490m.
Now, growth did slow in Q4 with reported revenue up 6% year-on-year and like-for-like growth dipping down to 2%. But with the company emphasising margin protection over growing sales through discounting, this isn’t cause for concern.
It’s also good to see the company’s management team taking a conservative approach to leverage with net debt less than one times full-year EBIT. With dividends safely covered three times by earnings, high cash flow and solid sales and profit growth, I reckon Dixons is one value stock worth taking a closer look at right now.
Paying off big time for shareholders
But if Dixons’ 3.2% dividend yield just isn’t high enough for you then it may be worthwhile to check out PayPoint (LSE: PAY). Last year the retail payment processor paid out a whopping 12% dividend yield yet still trades at a relatively decent 15 times earnings.
The key to the company’s success has been its stranglehold on the tills of convenience stores, off-licenses and the like. PayPoint’s best-in-class cash and card processing capabilities are in high demand, particularly as it rolls out new features that drive foot traffic to stores.
And with its market leadership very secure, the company is able to charge premium prices that drive margins ever higher. In the year to March, the company’s core retail network spun off £53.3m in operating profits from £117.5m in net revenue.
With £32m in net cash at year-end and low capital requirements, the proceeds of the company’s highly cash generative operations flow directly to shareholders. And while last year’s bumper 120.6p dividend per share is flattered by a 38.9p payment related to a business disposal, the underlying dividend yield still stands at a fantastic 8.2%.
PayPoint won’t be setting the world alight with double-digit growth anytime soon, but huge dividends and reliable growth at home, combined with its rapidly growing Romanian business, makes me optimistic that at their current valuation PayPoint’s shares are well worth buying.
But if PayPoint is just a bit too highly valued for you, why not check out the Motley Fool’s Top Small Cap of 2017, which trades at a bargain basement 8 times earnings. And this value investor favourite is also a sleeping growth giant as it has posted four years of double-digits earnings increases.
To discover why the Fool’s top analysts are so bullish on this stock, simply follow this link for your free, no obligation copy of their report.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of PayPoint. 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.