Five hidden gem income-paying stocks to consider

Good things sometimes come in small packages, and sometimes you find good things where you least expect them. Those aren’t just platitudes: they’re words of wisdom to keep in mind when you’re investing.

And on that note: here are five income-related stocks you might consider for your portfolio. They’re not the big names, and some of them have performed pretty poorly lately. But they’ve got potential and an attractive income stream.

Wynnstay Group (WYN)

Wynnstay Group (forecast yield: 4.5%) did poorly last year, but the agricultural products company continued its 20-year-plus record of raising its dividend. Much of its dip in profit was because of an unwinding of the excess profit in the previous year, on the heels of commodity price moves. Farmers are having a tougher time, but there has always been a level of cyclicality for the business. Wynnstay’s share price has fallen by one-third since the beginning of 2023, and I believe this is a good time to buy the shares for the long term.

In the year to October 2023, revenue improved from £713 million ($904 million) to £735.9 million ($933 million), while pre-tax profit slumped from £22.6 million ($28.6 million) to £9.2 million ($11.6 million). That is after a one-off stock loss at the Glasson fertilizer business as raw material prices fell back to more normal levels. Net cash was £19 million ($25 million). The full-year dividend was increased by 1.5% to 17.25p per share, which is still covered 1.9 times by earnings.

Wynnstay continues to invest in capacity with the first phase of investment in the Carmarthen feed mill completed. Capacity has also increased at the Astley seed plant.

Farmer sentiment remains poor and adverse weather conditions have hit winter cereal sowings. This year’s first half is likely to continue to be tough, but there is potential for recovery in the second half. Analysts at Shore Capital are maintaining their 2023-24 pre-tax profit forecast at £11.5 million ($14.6 million), which is back to the 2020-21 level, with further improvement to £11.9 million (15.1 million) the following year. This year’s dividend is expected to be 18.1p/share (23 cents).

The share price has recovered since the results, but it is still less than 11 times its prospective 2023-24 earnings.

Mattioli Woods (MTW)

Wealth management adviser Mattioli Woods (forecast yield: 5%) has a strong track record and most of its revenues are recurring – 90.8% in the first half.

Client assets of Mattioli Woods were flat at £15.2 billion ($19.28 billion) at the end of November 2023. New clients continue to be added, offsetting withdrawals and weakness in performance. Mattioli Woods owns smaller company fund manager Amati Global Investors, where funds under management have been hit by the poor performance of companies listed on the AIM market.

There are signs that AIM could be gaining some upward momentum, which would help the fund manager.

Mattioli Woods subsidiary Custodian Capital is the investment manager to Custodian Property Income REIT Ord, which is in the process of merging with abrdn Property Income Trust Ord, and it will retain the role at the enlarged REIT with a combined property portfolio worth more than £1 billion ($1.27 billion).

Interim revenues were 8% higher at £15.9 million ($20.1 million). There is always a second-half weighting, with full-year revenue estimated at £122.2 million ($155 million), up from £111.2 million ($144 million). Broker Singer believes that the upturn in the markets should underpin its current full-year pre-tax profit forecast of £33.9 million ($43 million), up from £30.7 million ($38.9 million) last year. A total dividend of 28.5p/share (36 cents) is expected.

Profit is set to steadily improve and that will enable single-digit growth in the dividend over the medium term, while maintaining a dividend cover of just below two times. The prospective multiple is 12.

Mattioli Woods has tended to trade on a relatively high multiple, but the poorer performance of stock markets in recent years has held back the share price, meaning that this could be a good time to be buying the shares.

H&T (HAT)

Pawnbroker H&T Group (forecast yield: 4.9%) is growing its pledge book faster than expected and the overall business is growing strongly. However, weak jewelry sales and rising wages have hit forecasts, but profit is still going to grow in double-digit percentages.

The pledge book for the core business is set to increase from £130.9 million ($166 million) to £143.4 million ($182 million) by the end of 2024. Management has held down costs, but the 10% rise in the national living wage in April 2024 will push up the wage bill.

The purchase of the trading assets of Essex-based rival Maxcroft Securities for £11.3 million ($14.3 million) increases H&T’s exposure to the provision of working capital to the self-employed and small businesses. The average size per customer is £4,023 ($5,100), which is nearly ten times the level at H&T.

Pricoa Private Capital is providing £25 million ($32 million) in additional financing for H&T. Even after the acquisition there should be £30 million ($38 million) of headroom for further growth.

There were forecast downgrades earlier in the year. Before the acquisition, Shore analysts had forecast a 2024 pre-tax profit of £33.5 million ($42.5 million), up from £26.6 million ($33.7 million). The 2023 dividend is expected to be 17p/share (22 cents), rising to 19p/share (24 cents) in 2024. That would increase the yield to 5.5%.

The share price has fallen by one-fifth so far this year and is trading below net asset value.

The prospective multiple for 2024 is six. Buy for growth.

Serica Energy (SQZ)

Acquiring Tailwind Energy last year made Serica Energy (forecast yield: 12.7%) one of the top ten oil and gas producers in the UK North Sea. It also made it highly cash-generative. Even if the oil price falls Serica Energy could continue to generate more than enough cash to pay increasing dividends.

The 2024 production guidance is between 41,000 and 48,000 barrels of oil equivalent per day (boe/day). Last year’s proforma production was 40,121boe/day. The Erskine field has been shut in since 25 January because of a compressor problem and production is not expected to restart until March.

Profit is not expected to grow with oil and gas prices at their current levels, but Serica Energy should continue to be significantly cash-generative, and the earnings cover will enable the dividend to be increased while still being well covered by earnings. In fact, the cash pile will continue to rise sharply even with higher dividend payments.

Broker Zeus estimates free cash flow of £141 million ($179 million) in 2023 and forecasts £266 million ($33.7 million) for this year. It expects a 2023 dividend of 22p/share (28 cents), rising to 23p/share (29 cents) this year. That is slightly lower than the consensus view. Net cash is forecast to be £264 million ($335 million) at the end of 2024.

Mitch Flegg is stepping down as chief executive after the publication of the 2023 results. Even so, he bought 75,000 shares at 190p ($2.41) each. Other directors are also buying. Sian Rees acquired 2,114 shares at 187p ($2.37) each, David Latin 117,255 shares at 184p ($2.33) each, and Malcolm Webb 16,367 shares at 183p ($2.32) each. Buy for the attractive yield.

Somero Enterprises (SOM)

Somero Enterprises Inc. Ordinary Shares (forecast yield: 6.8%) is different from the other companies in this article in that it doesn’t have a record of steady dividend increases over its two decades on AIM. Somero uses around two-thirds of earnings for its normal dividends, so they move in line with those earnings. However, it does pay special dividends out of its excess cash. The most recent special dividend was for 2021 and it was 19.7 cents/share. Currently, net cash is $33 million.

The floor-leveling equipment supplier is exposed to the movements of the construction sector, although the international spread of business can help offset weakness in some regions. The US had a stronger second half because of non-residential construction demand, but annual revenue still fell by 13%. There were improved performances in Australia and Europe, helped by parts and services revenues. A new service center will be up and running in Belgium by the end of the year.

New product launches are helping to hold up demand in poor economic conditions around the world. The first electric floor leveling machine was launched in January.

Last year was tough for Somero and adjusted pre-tax profit is estimated to have fallen from $42.3 million to $32.5 million. In 2024, revenue is forecast to remain flat at $120.7 million with pre-tax profit slipping to $31.6 million. This shows the resilience of the business and, when interest rates fall and the construction market recovers, profitability will also recover.

The 2023 normal dividend is expected to be 30 cents/share, and this will decline to 27.9 cents/share based on current estimates, which would reduce the yield to 6.3%. There is unlikely to be a special dividend in the short term, but as the cash pile increases there will be scope for another one. The shares are trading on ten times prospective earnings. Buy for recovery and income.

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