2 small-cap dividend stocks that could make you brilliantly rich

Bullseye_winner

Investing in companies which deliver strong dividend growth can be a smart way to beat the market. You get to enjoy a rising income, which will often also push up the share price.

Today I’m looking at two small-cap dividend stocks which I believe could be profitable buys after recent news.

Rock star

Rock-drilling specialist Mincon Group (LSE: MCON) provides the specialist equipment needed for companies to drill deep holes in the ground. Typical customers include miners, oil and gas firms and water companies.

This 40-year-old company has emerged from the downturn with net cash of €32m, and is poised for growth.

According to figures published today, Mincon’s sales rose by 29% to €47m during the first half of the year. Pre-tax profit rose by 26% to €6.3m, while earnings for the six-month period rose 26% to 2.4 cents per share. This provides a healthy level of cover for the interim dividend of 1 cent per share.

This payout is in line with last year’s interim dividend. If the final dividend is also unchanged, it will give the stock a yield of 2%. However, I think there’s scope for the payout to grow.

Mining companies have transformed their financial performance over the last 18 months, but investment in new projects has remained limited. If commodity prices maintain their current strength, I’d expect to see an upturn in spending on exploration and growth projects.

This could create booming market conditions for Mincon, enabling the firm to increase its profit margins, and boost dividends.

The stock has risen by 11% following today’s news. With a forecast P/E of 21, it isn’t obviously cheap. But I think this business could beat expectations over the next few years. In my view, Mincon remain a buy.

1,900% dividend growth

Would be you be interested in a company whose dividend has risen by 1,900% since 2007? The company in question is software group Idox (LSE: IDOX), which provides “specialist information management solutions” to public sector and regulated businesses.

The firm’s spectacular dividend growth has been accompanied by a 500% increase in the value of the group’s shares. Idox has been a super growth story. But what does it offer new investors today?

The firm said this morning that it will spend £5m to acquire a company called Halarose, which will extend Idox’s existing election software business. This valuation equates to a multiple of 4.5 times Halarose’s earnings before interest, tax, depreciation and amortisation (EBITDA) which seems reasonable to me.

Idox shares have performed poorly this year, falling 5% since January. The main reason for this seems to be a disappointing set of interim results in June, when first-half profits fell by 30%.

However, much of this decline was due to acquisition-related items. Second-half performance should be better, and the board has maintained its full-year guidance. It’s worth noting that this business benefits from a lot of ‘sticky’ recurring revenues, so profits should generally be quite stable.

According to the latest broker forecasts, Idox is expected to generate adjusted earnings pf 4.22p per share this year, giving a forecast P/E of 14.6. The dividend is expected to rise by 5% in 2017 and by 13% in 2018, giving a forecast yield of 1.7%, rising to 2%.

At current levels, Idox looks potentially interesting to me.

This could be today’s top small-cap buy

Idox and Mincon may deliver big gains. But our top analysts have identified a small-cap stock which they believe could be worth up to 66% more.

The company concerned is a home-grown business with a good record of growth. Shares in this firm look decidedly cheap to me. I think they deserve a closer look.

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Roland Head has no position in any 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.

Is this Neil Woodford stock on the cusp of a stunning turnaround?

Neil Woodford

Investment guru Neil Woodford’s admiration for Allied Minds (LSE: ALM) has remained undimmed despite the huge disruption currently washing over the Boston-based business.

The tech start-up specialist found itself on the defensive again in Thursday business after its half-year financials failed to stoke investor appetite. It was 2% lower on the day and remains a big casualty in 2017 — Allied Minds has shed exactly two-thirds of its value in the year to date.

On the plus side it saw revenues rising to $2m during January-June, up from $1.3m a year earlier. But this could not prevent losses widening during the period.

The intellectual property play chalked up a loss of $58.2m, worsening from the $52.2m loss in the corresponding 2016 period. And a whopping $44.6m loss was attributable to Allied Minds itself rather than its portfolio companies.

The business saw selling, general and administrative expenses jump by $5.4m in the first half, to $31.2m, while net cash and investments dropped to $177m from $226.1m a year earlier.

It ploughed $22.4m into its portfolio companies in the six months to June, it said.

Plenty of questions to be answered

Sour investor appetite for Allied Minds worsened in April after it announced a huge restructuring plan to jump-start its flagging fortunes, measures that have prompted it to withdraw funding at seven of its subsidiaries. The shake-up would also see the business likely endure an eye-watering $146.6m writedown, it advised.

Back then the company commented that “capital and management resources unlocked from this process will be diverted to other companies and opportunities in the portfolio where there is greatest potential for value creation.”

Allied Minds said that the move would divert more attention to its “more advanced subsidiaries and most promising early stage companies, and on scaling our origination platform to take full advantage of opportunities across our network of research institutions and corporate partnerships.”

These measures will take some time to bed in, naturally. But in the meantime, City brokers expect the company to endure further losses — losses of 38.9 US cents per share in 2017, and predicted to worsen to 42 cents in the following year.

Allied Minds has a poor track record of generating returns from its investments, and I remain unconvinced that its spring shake-up will put the company on the right path. And with the departure of long-time chief executive Chris Silva adding further uncertainty to the picture, I reckon risk-averse investors should shop around.

Get on the right page

I reckon those seeking reliable earnings growth should look past the Woodford favourite and lock gazes with Pagegroup (LSE: PAGE) instead.

The Addlestone business saw revenues detonate 16.9% during January-June, to £673.1m, or 7.7% on a constant currencies basis. And this propelled pre-tax profit 21.4% higher to £56.9m. While the company said that “challenging market conditions continued in some of our larger markets, including Brazil, Singapore and the UK,” strength elsewhere kept the top line chugging northwards.

The number crunchers share my bullish viewpoint, and predict bottom-line rises of 13% and 7% in 2017 and 2018 alone.

Sure, these projections leave the Pagegroup dealing on a forward P/E ratio of 18.9 times, peeking above the broadly-considered value watermark of 15 times. But I reckon the great growth potential afforded by its pan-global presence makes the company worthy of this slight premium.

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Royston Wild has no position in any 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.

Should you forget the stock market and focus on crowdfunding?

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In recent years, the popularity of crowdfunding has soared. For example, in 2016 the amount raised through crowdfunding surpassed venture capital funding for the first time in its history. By 2025, it is estimated by the World Bank that capital raised through crowdfunding will exceed $93bn.

Clearly, it is becoming a more mainstream means for start-ups and smaller companies to raise the capital they need to grow. It is also becoming more common for investors to invest a small part of their portfolios in crowdfunded ventures. Is now the time to increase this amount and ditch shares altogether?

The appeal of crowdfunding?

Put simply, crowdfunding is a means for a business to access capital without going through traditional channels such as banks or other lenders. It allows them to raise cash directly from investors, which can be a much faster process than through banks. It can also provide a degree of marketing for the business in question, which can help to get its name into the public domain at a time when it is probably not well-known.

The appeal of crowdfunding for a business, therefore, is relatively straightforward to grasp. However, the attraction of the platform for investors is somewhat more difficult to ascertain. Generally, the companies are either pre-revenue or have only a short track record of sales. They are therefore extremely high risk, and it appears as though the vast majority of crowdfunding investments end with a loss of some degree to the investor.

Furthermore, crowdfunding lacks the transparency of the stock market. In other words, while listed companies are required to provide a minimum amount of information as well as regular updates to investors in order to allow them to conduct due diligence, doing so with a crowdfunded venture is much more difficult. Although some information is required to be provided to investors, a company with no track record may be little more than an idea.

The appeal of shares

In contrast to crowdfunding, the stock market has an excellent track record of creating wealth for investors. Not all investors end up in the black, but history shows that buying a diverse range of shares within a portfolio and holding them for the long run generally leads to a high-single digit annualised return. In addition, dividends are often paid, and it is possible to buy shares in a company for a much smaller multiple of sales or profit than is the case with many crowdfunded ventures.

In addition, shares are highly liquid and can generally be sold easily. Crowdfunded ventures are among the most illiquid of mainstream investments, which adds an extra degree of risk for investors. And with multiple funding rounds likely due to the young age of many of the companies on crowdfunding platforms, dilution of shareholdings is a major issue for investors.

Therefore, while the idea of crowdfunding may sound appealing and the chance to buy into a stock in its early days may be enticing, the reality is that the risk/reward ratios available in the stock market are likely to be far superior in the long run.

5 stocks worth a closer look today

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One multi-bagging FTSE 250 stock I’d buy and one I’d avoid

Aggreko heating and drying equipment

The market likes this morning’s news from Marshalls (LSE: MSLH) and the shares are up more than 3% as I write, at 414p.

But if you’d been holding since July 2012 you’d be sitting on a capital gain of around 431% — a cracking five-year investment outcome by most standards. Yet I reckon there’s more to come from Marshall’s and I’d buy some of the firm’s shares even now.

Cyclical and growing

The firm earns more than 90% of its operating profit from hard landscaping products, which it supplies to domestic, public sector and commercial end markets. Demand is strong and the company has enjoyed robust double-digit increases in annual earnings per share over the past five years.

Cyclicality plays a big part in operations, but the company is working hard to achieve growth too. One initiative involves investing in, switching over to, and growing the firm’s Marshalls brand. Another is the ramping up of research and development, which the directors say is delivering “an encouraging pipeline of new products.”

But to invest now is to invest on the up-leg of the current macroeconomic and trading cycle, so while I’m keen on the shares, I’d also remain vigilant for a deterioration in trading conditions down the road. Yet I can’t argue with today’s interim results. Revenue pushed up 8% during the first half of the year and earnings per share shot up 16%. The directors expressed their ongoing confidence in the outlook by slapping an extra 17% on the interim dividend, which I think is encouraging.

Potential abroad

Longer term, I think the firm’s fast-growing international business could drive decent investor returns. The division contributed 6% of revenue in these results but that’s 25% higher than a year ago. The directors are also keen to invest the firm’s strong cash inflow into acquisitions that could drive further returns but say they will not compromise on their investment criteria. Overall, I think Marshall’s immediate future looks bright.

Meanwhile, Aggreko (LSE: AGK) is another firm with a lot of cyclicality in its operations but it has performed poorly over recent years, with earnings falling since 2013. The firm is a global provider of rental power, temperature control and compressed air systems, and if you’d held the shares since September 2012, you’d be nursing a capital loss of around 64% — ouch!

Challenging trading environment

The trading environment has been tough for the firm for most of the period that Marshalls has been flying. Problems include a downturn in the oil and gas industry and a slowdown in Latin America. Sometimes, it seems, diversifying across markets and continents can deliver negative outcomes by exposing a firm to every bit of trouble wherever it occurs.

City analysts following the firm expect earnings to recover by 12% during 2018, and the valuation looks reasonable with a forward price-to-earnings ratio just over 13 for 2018 at today’s share price of 849p. There’s even a 3.3% forward dividend yield. But I’m not tempted because the firm has just demonstrated its vulnerability during a period that we might have expected it to perform well. What happens to Aggreko if world economies really tank? 

Under-researched stocks

I like the look of Marshalls and I’m avoiding Aggreko, but several stocks look interesting right now. To help you find more of them, a good place to start is with a report produced by the outperforming analysts at The Motley Fool called 1 Top Small-Cap Stock From The Motley Fool.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Marshalls. 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.

2 growth stocks I’m not backing to recover any time soon

Diamonds

Gem Diamonds (LSE: GEMD) flatlined in Thursday business after a less-than-enthusiastic response to the company’s half-year numbers. The stones producer was last at 78p per share and still anchored within spitting distance of August’s record lows.

The South Africa-focused digger announced that revenues fell 15% during January-June, to $92.9m, a result that pushed underlying EBITDA 70% lower to $13m. Gem Diamonds suffered as a result of falling stone prices in the first half — the average price per carat declined to $1,779 from $1,899 a year earlier. But this was not the company’s only problem, of course, with ongoing production problems causing the number of recovered carats to reverse 12% year-on-year to 50,478.

The company announced that its group-wide cost reduction programme is now under way, with $15m worth of annualised efficiency and cost reduction initiatives having been identified already and due to kick in from this October.

In other news, Gem Diamonds announced that it had received an offer for its Ghaghoo mine in Botswana, which has been on care and maintenance since March due to weak demand for the size and quality of output produced by the asset. The company is currently considering the offer, it advised.

In a hole

The share price has remained in a tailspin during the course of 2017 due to difficulties in the global diamond  market.

The company noted that that “the global market for both rough and polished diamonds remained cautious” during January-June, adding that “financing challenges persist and the volatile macroeconomic environment continues to create challenges for the middle diamond market.”

As a result, the City is expecting earnings at the business to topple 83% in 2017, resulting in a massive forward P/E ratio of 44.9 times.

While Gem Diamonds’ may take a more favourable view of the market in the longer term, the current issues hampering stones demand could very well drag on for some time yet. And these compressed diamond prices, combined with lower group output, are heaping huge pressure on the digger’s balance sheet right now. The company had net debt of $14.2m on its books as of June versus cash on hand of $66.5m a year earlier.

I reckon the digger is a risk too far right now.

In the doghouse

I am also less than assured by the investment case of Pets At Home (LSE: PETS) right now.

Latest Office of National Statistics retail sales data for July released today showed sales growth of just 0.3% in July, matching the prior month’s figure. And the story was particularly bad for sellers of non-food goods — demand for inedible products dropped 0.1% last month, the ONS revealed.

And I expect pressure on the likes of Pets At Home to build in the months ahead as the squeeze created by stagnating wage growth and rising inflation worsens. Sure, the company reported a perky 2.7% rise in like-for-like sales during April-June, but I expect this top-line uptick to prove a mere flash in the pan.

The City expects earnings at the Wilmslow business to fall 12% in the year to March 2018, and I reckon share pickers should be braced for extended bottom-line trouble. I for one won’t be investing any time soon despite the retailer’s conventionally-attractive forward P/E ratio of 14.5 times.

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Royston Wild has no position in any 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.