The smaller index has bounced back after Covid-19 uncertainty, but it’s hard to predict how small stocks will react.
Since collapsing under the weight of Covid-19 uncertainty early last year, the Alternative Investment Market (AIM) has gone on to soar by 112%. And at these multi-year highs of around 1,250 points, it’s back to levels not seen since 2007, when the make-up of the market looked very different to how it does now.
Past performance is not a guide to future performance.
Back then, there were 1,694 companies trading on what is traditionally the home of smaller, growth-oriented shares. Today, that number has slimmed down to just 822. In between, AIM has had to contend with volatility caused by events such as the financial crisis, Brexit and coronavirus. Many companies have fallen by the wayside - delisting, collapsing, moving up and being bought.
Today, AIM’s massive market-cap spectrum ranges from firms with a valuation of just over £1 million all the way up to £5.2 billion. Indeed, the 28 stocks with market caps over £1 billion on AIM represent around 40% of its overall capitalisation. Among the biggest names are companies such as ASOS (LSE:ASC), Boohoo (LSE:BOO), Abcam (LSE:ABC), Jet2 (LSE:JET2), Hutchison China and Fevertree Drinks (LSE:FEVR).
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Yet part of the appeal of AIM among investors is its slightly speculative nature (as well as some of the tax advantages that come with it). The late investor Jim Slater once said that “elephants don’t gallop” when describing the fact that large companies simply can’t rerate as spectacularly as smaller ones can. It’s precisely that explosive growth potential that draws many investors in.
A challenge, of course, is that the small size of many AIM shares means that they are inherently vulnerable to uncertainty. In the aftermath of a black swan event such as Covid-19, it can be perilously difficult to predict how small firms will react, even though some will continue to grow without a problem.
One certainty - which we saw right across the London market last year - is that companies will stop paying dividends instantly when future finances become uncertain.
Hunting for AIM dividends
AIM companies paid out a record £1.33 billion in dividends during 2019 - but that’s estimated to have fallen by at least a third in 2020. And while those numbers pale by comparison to the near £100 billion that was paid out across the rest of the market, AIM dividends have become a useful marker of well-managed, cash-generating businesses.
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Plus, some of the yields on offer are well above the wider market average, which stands at around 2.7% for the FTSE All Share and 2.0% for AIM itself.
To get an idea about where AIM company dividends are set to rise in the year ahead, it’s worth looking at the current dividend-per-share growth forecasts. In most cases it's likely that companies are recovering from having cut their payouts last year, but in others the dividends haven’t been affected at all. These firms offer yields in excess of 3.2% and most have positive Stockopedia classifications as either Super Stocks, High Flyers or Turnarounds.
|Name||Mkt Cap (£m)||Yield (%)||DPS Gwth % Forecast 1y||StockRank Style||Relative Price Strength 6m|
|FRP Advisory Group (LSE:FRP)||304||3.2||501.8||Style Neutral||5.14|
|Alumasc (LSE:ALU)||79.5||3.7||337.5||Super Stock||82|
|Sylvania Platinum (LSE:SLP)||313.5||4.9||333.5||Super Stock||36.1|
|Arena Events (LSE:ARE)||54.7||6||300||Turnaround||42.6|
|Vianet (LSE:VNET)||30.7||5.4||235.3||High Flyer||10.2|
|M P Evans (LSE:MPE)||406||3.3||38||Super Stock||7.39|
|Polar Capital (LSE:POLR)||800.9||4.6||11.4||High Flyer||17.2|
An improving outlook
While dividends in smaller, more speculative firms are not always prioritised by investors, these payouts can be an important component in the total return. By their nature, these firms are likely to cut dividends when cash preservation is essential. But very strong forecast dividend growth in some AIM shares may well be a useful extra pointer to those with more solid finances that are feeling confident about their operations and optimistic about what lies ahead.
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