Whats a company to do when its 788m mountain of cash on hand has grown to nearly a quarter of its total market cap? Well, the standby option is normally a big dividend or a big acquisition. Management at gambling software provider Playtech (LSE: PTEC) has broken the mould and opted for both.
Playtech has long paid out impressive dividends but in August the company surprised investors with a bumper 150m special oneon top of a 15% increase to interim payouts. Analysts were already forecasting a 5.3% full year yield, so income investors should be very interested in this development.
A big chunk of Playtechs remaining cash hoard is being spent on adding to the companys dominant position in gambling software as well as expanding into financial trading services. The announcement today of a 110m deal for a payment processing brokerage further adds to Playtechs position in this latter category.
This deal brings Playtechs total M&A spend in 2016 up to a whopping 280m, which together with significant deals announced last year means the company will need to concentrate on integrating these disparate assets sooner rather than later.
The good news is that paying for this shopping spree is well within Playtechs reach thanks to impressive cash generating capabilities. In the first six months of 2016 alone the company had 137m in EBITDA from 337m of revenue.
These high margins come from providing all major gambling sites with the software to run their online and offline gambling services. As punters increasingly shift from gambling in high street shops to gambling on their mobiles, demand for Playtechs services should only increase. Together with a growing presence in the financial trading services segment and a stellar dividend, I believe Playtech is worth a closer look for growth investors even with shares trading at 33 times trailing earnings.
One for pet lovers
Another acquisition-heavy business is veterinary clinic chain CVS Group (LSE: CVS). Itadded 67 surgeries in the year ended June 30and now has 363 across the UK. The companys business plan is to purchase individual clinics, improve their profitability, and expand the potential market for its own insurance and pharmacy offerings.
This plan is working well so far with like-for-like sales growth of 4.8% and acquisitions leading to a full 30.4% rise in year-on-year profits in 2016. The companys Healthy Pet Club insurance offerings are one of the fastest growing segments. Membership rose 18.8% year-on-year and customers recurring payments now account for 12.3% of total revenue.
Unfortunately providing animal health care isnt as high margin a business as Playtechs. Operating margins over the past year were only 5.4% and the company had to turn to leverage to fund new acquisitions. Due to 61.3m in acquisition costs net debt increased to 93.1m at year end. This was 2.54 times EBITDA, which is well within debt covenant limits, but could become a worry should acquisition turnarounds not perform as well as in the past or if customers cut back on pet healthcare in an economic downturn.
CVS Group is an interesting and fast-growing business, but debt-fuelled acquisitions make me leery when a companys operations arent throwing off significant amounts of cash.
Want high growth without high debt? I suggest checking out the Motley Fool’s Top Growth Share, which has increased sales every single year since going public in 1997.
With international expansion just taking off the Fool’s head of investing believes the company could continue its stellar runand triple in size in the coming decade.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
