Sometimes the market offers you an opportunity thats too hard to pass up and seems as if this has happened with toy producerCharacter Group (LSE: CCT) today.
Shares in Character are trading down by around 10% today after the company issued a quasi-profit warning last night. The collapse of Toys R Us, one of the groups biggest customers, has muddied Characters outlook for 2018 and as of yet, management does not know the extent to which this will impact our trading position with them. As a result of this uncertainty, the company has no reliable visibility on the important 2017 Christmas trading period.
Worryingly, the update also noted that conditions in the wider market generally remain challenging.
The market hates uncertainty, and thats why shares in Character have plunged in early deals. However, I believe that this decline presents an opportunity for value hunters.
Value in cash
The decline ofToys R Us is a headache for Character, but its not the end of the world. The company, which is swamped with more than $5bn in long-termdebt, hopes that by entering Chapter 11 bankruptcy, and gaining protection from its creditors, it will be able to restructure and bring its vision to fruition. In other words, this isnt the end of the company and orders for Characters products are unlikely just to vanish overnight.
Thats why I believe that todays declines present a great opportunity for investors. The shares now support a dividend yield of 3.7%, and theres more than 18m of net cash (18% of the market value) on the balance sheet to support the business and dividend, which costs 2.8m per annum.
The shares currently trade at a forwardP/E of 9.4 on estimates for the year ending 31 August 2017. As its not possible to gaugehow much of a headwind Toys bankruptcy will prove to be for the business, this valuation offers a margin of safety for investors. Even a 15% decline in earnings per share would only bring the valuation back up to the sector median of 15.2.
Slowing growth
Growth concerns have also held back shares in telecoms company Manx Telecom (LSE: MANX) over the past 12 months.
Last week the company, which provides communications services on the Isle of Man, reported apre-tax profit for the first half of 5.2m, down from 6.3m in the prior period as revenue slipped to 38.5m from 39.2m. Investors responded to these results by sending the shares lower by 3%.
Nonetheless, despite slowing revenue growth, I believe shares in Manx look attractive based on the companys income potential and valuation.
Defensive income
Manx currently returns the majority of its income to investors via dividends. For example, over the past two years, the firm has generated free cash flow from operations of 30.8m and returned 23.4m of this to investors. This generous cash return policy looks set to continue with City analysts predicting a dividend payout of 11.4p for 2017 and 11.9p for 2018, indicating a dividend yield of 6% for 2018 at current prices.
As well as this market-beating dividend yield, shares in Manx also look cheap compared to the rest of the telecoms sector. Specifically, shares in the telecoms firm trade at a forward P/E of 13.6, based on City estimates for 2017 while the rest of the sector trades at a median P/E of 14.2.
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