Should you snap up – or sell – this top income stock after today’s results?
For some time now, 580m cap photo booth supplier Photo-Me International (LSE: PHTM) has been a great stock for income investors to hold thanks to the companys policy of making regular, double-digit hikes to the dividend. Dotodays interim figures change things? Lets take a look.
Exceeding expectations
With sales growing by 19.2% and pre-tax profits rising by 20.2% to 31m (4% and 4.3% increases at constant currency respectively), it looks like the good times are set to continue. Much of this performance can be put down to the rollout of Revolution the companys laundry business.If anything, this highlights how seemingly dull services can be real money-spinners for both companies and their investors. Sometimes, boring can be beautiful.
As an aside, Photo Mes balance sheet remains strong with the company now having a net cash position of 68m 5.6m less than in April of this year. Although some debt isnt necessarily a bad thing, this kind of financial discipline is something I look for in a business.
Perhaps most importantly for income investors, the company has remained true to its dividend policy and raisedthe interim payout by another 20%. This leaves Photo Meoffering a yield of around 4.5%. Although cover is looking a little stretched, thats an awful lot more than youd get from any cash savings account.
Commenting on results, Non-executive chairman John Lewis reflected that performance in the first half was ahead of the board expectations and that itnow expects Photo Mes profits will significantly exceed current market expectations. Thats the sort of positive talk I like to hear. So long as the company can continue this momentum (and carry on generating excellent levels of return on capital and high operating margins), its very likely that it willsmash through the recentshare price peak of 182p in the near future. Its already well on its way rising over 6% in early trading.
Any downsides? Well, on a forecast price-to-earnings (P/E) ratio of just under 19, shares in the business arent exactly cheap.With this in mind, lets look at a candidate that could steal Photos Mes crown of top small cap income share the UKs leading independent toy company, Character (LSE: CCT).
Dividend delight
Sincereporting full-year figures to the market at the beginning of the month, shares in the 111m business, which owns licences for brands such as Peppa Pig, Teletubbies and Stretch Armstrong,havejumped 10% to 521p. With revenueandunderlying pre-tax profits both rocketing22% (to 121m and 12.5m respectively), such a rise was always on the cards. Despite this, shares still trade on a relatively low forecast P/E of just 10.
However, its the cracking 33% increase to the interim dividendthat really grabs my attention. This leaves the companys shares generating a well-covered yield of 3.2%. Only boardswith strong confidence in the future health and growth prospects of the company would contemplate such amove.
With a level of financial discipline to rival Photo Me (including a 53% rise in its net cash position on 2015) and similarly high levels of return on the capital it invests, Character ticks a lot of boxes.Like Photo Me, Character also has a growing international presence, with sales from overseas rising a barnstorming 50% over the last reporting period. With Brexit at least somewhere on the horizon, this cant be a bad thing.
While today’s results and past historical performance suggest thatPhoto Me remains an great stockfor income investors to hold on to, I also think that any business performing as well as Character warrants serious consideration.
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Paul Summers 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.