Seven AIM dividend payers with room to grow

These small-caps not only generate enough cash to pay attractive dividends, they also have solid growth potential. Here are former AIM writer of the year Andrew Hore's income stocks to watch.

Volatile stockmarkets make dividend paying companies even more attractive. That is because they generate cash to pay the dividends and the earnings and yield provide a base for the share price. Those companies that do not make a profit or trade on heady multiples have already seen their share prices slump. 

It is no good just looking for the highest yields, though. Utilitywise has a historic yield of 34% but no one expects any dividend this year. It is important that a company continues to generate the cash needed to fund the dividend. 

These days, given the poor level of bank interest rates, even a 3% yield is attractive, particularly if there is also potential for growth. Some of the seven examples below have yields of more than 5%, and they may have cash in the bank as well as a cash generative business. 

Manx Telecom (MANX) 

152p

Mkt Cap: £175 million

Forecast yield: 7.9%

Manx Telecom does not have a racy business and its performance has been relatively static in recent years. Even so, the fixed line, broadband and mobile telecoms business has been able to pay a growing dividend out of its cash flow. 

Manx has an investment in a company that has developed a hearing loss product - certified as a medical service – and this could become a highly profitable business in its own right without hampering further dividend growth for Manx. 

Investee company Goshawk has signed up BT Group's mobile subsidiary EE in the UK. There is a potential UK market of up to three million people with moderate to severe hearing loss. The product will be launched in the UK next year and this may require investment of £10 million.  

Assuming average monthly revenues of £12 and 700,000 subscribers, the UK EBITDA would be greater than Manx's current EBITDA of around £27 million. That level of profit could be achieved in six or seven years. Goshawk will be loss-making in the next three years or so following its launch. 

Then, there is the international potential for the product. There is no certainty that the hearing loss product will be as successful as hoped but any significant success will provide upside for Manx. Meanwhile, the strong market position in the Isle of Man means that the core business will remain cash generative and there are benefits to come from recent capital spending and efficiency improvements. Despite a cover of 1.1 times, the dividend should continue to grow or at least be maintained. The shares are trading on 11 times 2018 earnings. 

Strix (KETL) 

136.4p

Mkt Cap: £259 million

Forecast yield: 5.2%

Kettle controls supplier Strix Group is an international business and it has strong shares of its main markets. Two-thirds of manufacturing customers pay in advance, which explains the strong cash generative nature of the business. Even after dividend payments, net debt is set to fall from £30.8 million at the end of this year to £18.2 million at the end of 2019.

Isle of Man-based Strix has 38% of the global market for kettle controls and it is more than three times the size of its largest competitor. The regulated markets are growing at 3% a year and Strix has 61% share of these markets. Products have been developed to improve market share in less regulated markets, including Russia and South America. The Chinese market has returned to growth and Strix has a 48% share, having fought patent infringements. Tariffs could hamper progress. 

This is the first full year as a quoted company and a dividend of 7p a share was promised with an anticipated 10% increase for 2019. Pre-tax profit should improve from £26.9 million to £29.1 million this year and rise to £31.6 million next year. This year's dividend should be twice covered by earnings. The forecast 2018 price/earnings (PE) multiple is 10. 

Amino Technologies (AMO)

120p

Mkt Cap: £88.1 million

Forecast yield: 5.7%

IPTV hardware and software supplier Amino Technologies has been a successful recommendation in the past but the share price was hard hit by a profit warning this autumn. There is still a cash pile that provides confidence that the dividend will continue to be paid. 

Orders have been delayed and component prices have risen. The 2017-18 pre-tax profit estimate was cut from $15.5 million to $11.5 million, and earnings per share will be 15 cents a share after a higher tax charge. A flat profit is expected next year. Net cash should be $18 million by the end of November 2018 and continue to rise after that. 

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The dividend will still be increased by 10% to 6.8p a share this year and then at least be maintained in the current financial year. The 2017-18 dividend will be covered around 1.6 times by earnings, depending on the $/£ exchange rate. The share price fall has been overly harsh and the prospective multiple is 11. 

Wynnstay Group (WYN) 

415p

Mkt Cap: £82.1 million

Forecast yield: 3.2%

Agricultural feed and products supplier Wynnstay has been growing its dividend for more than a decade. Agriculture is a cyclical sector, but the increases in dividend have continued whether earnings have risen or fallen. This year's forecast dividend of 13.2p a share would be nearly three times covered by earnings. This level of cover and net cash means that Wynnstay can afford to continue the upward trend. 

The UK government will continue to provide subsidies to farmers whatever the outcome of the EU withdrawal. There could also be additional opportunities for the larger, more efficient farmers that make up the Wynnstay customer base. 

The latest trading statement for the year to October 2018 has led to forecast upgrades. Strong feed and fertiliser sales due to the hot summer and good retail sales boosted fourth quarter figures. 

Pre-tax profit is expected to increase from £7.9 million to £9.4 million this year thanks to the positive trading conditions. Profit growth is likely to be more modest this year. The shares are trading on 11 times prospective earnings. 

First Property Group (FPO) 

51.5p

Mkt Cap: £57.3 million

Forecast yield: 3.3%

First Property Group has consistently increased its dividend with the interim rising by nearly 5% to 0.44p. The asset manager has £730 million of property assets under management in the UK, Poland and Romania. Revenues come from management fees and the individual managed funds have an average life of more than six years. More than £3 million was generated from operations in the first half, which comfortably covers the dividend cost. 

The economies of Poland and Romania are growing strongly, although it can be difficult to find suitable acquisitions in Romania. The interim figures were held back by the expiry of a lease at an office block in Warsaw and this space is being re-let. 

An additional benefit of an investment in First Property is that chief executive Ben Habib believes that a hard Brexit would provide enormous opportunities for the company. Habib is optimistic about the UK commercial property market prospects whatever happens. The Fprop Offices managed fund still has funds to invest but in the short-term there are limited opportunities because of uncertainty about the future. 

First Property has reduced its stake in Fprop Opportunities to below 50% so it will no longer be consolidated. The reported income and pre-tax profit numbers will be lower but the underlying earnings will be the same and the underlying NAV – currently 62.2p a share - will not be significantly affected. 

Lok'nStore (LOK) 

430p

Mkt Cap: £127 million

Forecast yield: 2.8%

Self-storage sites operator Lok'nStore operates in a sector where demand outstrips supply and the business has strong recurring revenues. Growth is coming from increasing occupancy rates with a small contribution from price increases. Revenues increased from £16.7m to £17.8m in the year to July 2018. 

Recent openings are yet to reach maturity and further openings are planned. This will provide further growth over the next three years. Net debt was £32.5 million –well within existing bank facilities of £50 million. Another £10 million will be invested this year. 

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Lok'nStore increased its dividend by a further 1p a share, to 11p a share, for the year to July 2018 – there was cash available for distribution of 19.4p a share - and it is on course for the same 1p a share improvement this year.

The shares are trading at a 10% discount to NAV of 480p a share, whereas rivals, such as Big Yellow, are trading at a premium to NAV. Lok'nStore's NAV is forecast to increase to 569p a share over the next five years. 

Billington (BILN) 

300p

Mkt Cap: £38.8 million

Forecast yield: 4%

Steel structures supplier Billington is well into the upward part of the cycle of the sector, although there has been some levelling off in the past year. Three contracts worth £41 million have been announced, one of which is outside of the UK, and that will underpin current forecasts. 

A dividend of 12p a share is forecast. The dividend is covered 2.5 times and net cash of £7.5 million is expected at the end of 2018. 

A 2018 pre-tax profit of £4.6 million is forecast and the same profit is forecast for 2019. However, further contract wins could lead to an upgrade. The forecast price/earnings ratio is 10. Due to the cyclicality of the business Billington should not be on a high rating at this point in the cycle but the rating is relatively modest. 

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