Interactive Investor

Five of AIM’s most attractive dividend stocks

9th June 2023 14:52

by Andrew Hore from interactive investor

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Plenty of AIM companies pay dividends and are highly profitable and cash generative. Award-winning AIM writer Andrew Hore reveals the highest dividend payer on AIM and five of his favourite income shares.

Five attractive shares 600

Link Group’s latest AIM Dividend Monitor shows record dividend payments by AIM companies in 2022 with an estimate of £1.34 billion, which is slightly higher than the total in 2019. It may be difficult to grow total dividends again this year.

Link analyses all the dividends paid by AIM-quoted companies on ordinary shares, although investment trusts that generate the funds for dividends from equities and bonds are excluded. The totals can be adjusted in subsequent publications. For example, the 2019 total in the 2020 publication was £1.33 billion, while in the latest it is £1.27 billion.

Special dividends continue to make up a higher proportion of the total dividends than most of the years prior to 2021, although they did fall to 10% of the total in 2022. This may be down to some companies being wound up, such as ThinkSmart and Cambium Global Timberland, and returning cash to shareholders. Special dividends are set to be a large contributor in 2023, with Circle Property making two payments out of the proceeds of the sale of the property portfolio prior to the cancellation of its AIM quotation on 1 June.

Food and drink sector dividends more than doubled from £51.3 million to £112 million. Mixer drinks supplier Fevertree Drinks (LSE:FEVR) is the highest dividend payer on AIM, with £68.8 million distributed in 2022.  

Business process outsourcing company iEnergizer was the second-largest dividend payer in 2022, but it is cancelling its AIM quotation so there will not be any more dividends from this company. The eighth-biggest dividend payer is aggregates supplier Breedon Group (LSE:BREE), which moved to the Main Market last month – although it paid its final dividend before that.

The only one of the top 10 payers in 2022 that is set to grow its dividend at a constant pace is Smart Metering Systems (LSE:SMS), which has promised a 10% annual dividend increase. The index linked nature of most of its revenues enables this growth rate to continue.

The other remaining companies in the top 10 payers in 2022 are either going to have modest increases or may even cut their dividend. Watkin Jones (LSE:WJG), which paid £21.8 million in dividends last year - it was just outside the top 10 - is likely to cut its dividend by one-quarter.

Clinigen and Secure Income REIT are two significant dividend payers that were taken over last year, while Warehouse REIT (LSE:WHR) moved to the Main Market. This year, K3 Capital, Appreciate and AdEPT Technology have been taken over, which will further reduce this year’s dividends.

There have been few new admissions in the first half of 2023, and none appears set to be a major dividend payer. That means it could be difficult to maintain the total dividends in 2023 even with another large contribution from special dividends.

High payers versus high yielders

Link Group estimates that normal dividends paid by AIM companies are likely to provide a yield of 2.4% in the coming 12 months. That excludes the non-dividend paying AIM companies.

The figures in the Link publication are for large cash payments, but these are not necessarily high yielding companies. There are around 100 AIM companies with a yield of 3% or more, according to Sharepad.co.uk. Some of the higher yields will not be maintained, but many are well covered.

There are companies with attractive yields that are highly profitable and cash generative.

Name

Price

Market cap (m)

Share price in 2022 (%)

Share price in 2023 (%)

Forecast PE

Current yield (%)

Forecast yield (%)

Forecast dividend cover

Duke Royalty Ltd (LSE:DUKE)

33.25p

£138.80

-19.9

-2.92

10.0

7.2

8.5

1.2

RBG Holdings Ordinary Shares (LSE:RBGP)

33.5p

£31.90

-45.1

-47.7

4.4

7.1

12.7

1.8

Michelmersh Brick Holdings (LSE:MBH)

89.5p

£85.00

-25

-6.77

8.8

4.7

4.6

2.5

The Property Franchise Group (LSE:TPFG)

310p

£99.30

-27.4

37.8

11.8

4.2

4.5

1.9

Wynnstay Group (LSE:WYN)

467.5p

£105.40

3.28

-22

11.1

3.7

3.9

2.3

Source: SharePad as at 9 June 2023.

Duke Royalty Ltd (LSE:DUKE) provides capital to a range of businesses and in return it gets a royalty stream that can generate cash flow to pay dividends. Duke provides an injection of secured capital for a business over a period between 25 and 40 years. Royalty revenues are related to the revenue performance of the business.

The company has strong repeatable cash flow from its investments and the potential for gains on the investments themselves. The latest exit was unusual because it was so quick. The takeover of data centre services provider Instor Solutions generated cash of $11.2 million and a gain of $2.4 million. The initial investment was in March 2023. Net assets could be more than £155 million by the end of September 2023.

The 0.7p a share quarterly dividend is covered by free cash flow. The dividend should steadily increase over the years. At 33.25p, the shares trade on a 10% discount to forecast net asset value (NAV) and the prospective dividend yield is 8.4%.  

Bricks maker Michelmersh Brick Holdings (LSE:MBH)had a strong 2022, with overall UK brick stocks remaining at historic lows and high demand for the company’s specialist bricks. The market fundamentals remain positive. Management fixing energy costs meant that cost increases were not as high as they might have been, helping to maintain margins.

In 2022, Michelmersh Brick increased revenues by 15% to £68.4 million, while pre-tax profit also rose 15% to £12.5 million. There was a small contribution from FabSpeed, which manufactures off-site pre-built brick products, such as chimneys, acquired in November. That is a new market for Michelmersh.

The 2022 dividend was raised by 16% to 4.25p a share, which was more than forecast. The 2023 dividend forecast was upgraded to 4.5p a share at the time of the full-year results. That would be 2.2 times covered by forecast earnings. The share price has fallen to 89.5p since the results, which means that the prospective multiple is nine and the forecast yield is 5%.

Wheatfield 600 x 400

Agricultural products supplier and retailer Wynnstay Group (LSE:WYN)has a record of increasing its dividend every year for two decades, even though the business is cyclical. It supplies products, including grain and fertiliser, to farmers and has retail outlets focused on the farming community.

In the year to October 2022, revenues were 42% ahead at £713 million, while pre-tax profit almost doubled to £22.6 million. Net cash was £18.2 million, although since then Wynnstay has bought Cornwall-based feeds manufacturer Tamar Milling. The total dividend was 17p a share.

Profit will not be maintained at the bumper level of last year. Analysts at Shore forecast a 2022-23 pre-tax profit of £12.2 million, which is higher than the 2020-21 level, although the outcome will depend on summer trading. The dividend is still expected to increase to 17.9p a share, covered 2.3 times by estimated earnings. At 457.5p, the shares are trading on 11 times prospective earnings and the yield is 3.9%.

The Property Franchise Group (LSE:TPFG)owns and operates lettings and estate agency brands, as well as online agency eweMove. The acquisition of rival Hunters has boosted the performance of the company. Trading is tough because of the weak home sales market, but the lettings business is much more resilient and growing.

In 2022, revenues rose from £24 million to £27.2 million, while underlying pre-tax profit improved from £9.4 million to £10.7 million. Like-for-like growth in revenues was 8%. Lettings contributed 55% of management service fees. Financial services revenues are still a relatively small proportion of the group total. The dividend was increased from 11.6p a share to 13p a share.

Canaccord Genuity forecasts a small pre-tax profit increase to £11 million for the current year. The increase in the rate of corporation tax will mean a dip in earnings. A 14p a share dividend is forecast, and it would be 1.9 times covered by forecast earnings. At 310p, the prospective multiple is 12 and the forecast yield is 4.5%.

Legal services provider RBG Holdings (LSE:RBGP) has got rid of its chief executive and plans to sell its LionFish litigation funding business, which has performed poorly. RBG owns two high-profile legal brands in Rosenblatt and Memery Crystal, as well as sell-side corporate finance boutique Convex Capital. These activities are still doing well.

In 2022, revenues were one-quarter ahead at £54.1 million, while underlying pre-tax profit from continuing operations improved from £6.6 million to £10.9 million, including litigation gains of £3.8 million. The underlying litigation business lost money. Net debt was £19.2 million at the end of 2022, which could put off some investors.

The company’s policy is to pay three-fifths of earnings in dividends. Last year, the dividend was halved from 5p a share to 2.5p a share and it could recover to 4.5p a share this year. This year’s pre-tax profit forecast is £10 million. Even an unchanged dividend would provide a yield of 7.1%.

At 35p, the share price is not far off its all-time low. Given the prospective multiple of less than five, it appears that investors need reassurance that the forecast can be achieved. This is riskier than the other companies, but there is also more potential upside in the share price.

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.

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