Today I’m going to look at two mid-sized firms with attractive dividend yields and good growth potential.
These companies are both major players in essential sectors. Unlike some sexy tech stocks, I’m pretty certain that the services provided by these companies will still be needed in 10 or 20 years’ time.
Keep it rolling
When Edward Stobart took over the running of the Eddie Stobart haulage business from his father in the 1970s, he realised that customers would pay more if he could combine transport and warehousing services. This insight helped him to build the group into one of the UK’s largest logistics operators.
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After several changes of ownership, Eddie Stobart Logistics (LSE: ESL) floated on London’s AIM market last year. Share price performance has been disappointing so far and the stock is down about 17% since its flotation.
However, today’s half-year results suggest to me that the firm’s share price could soon find some support. Revenue rose by 25% to £359m during the first half, thanks to a mix of acquisitions and major contract wins. Underlying operating profit rose by 7% to £18m, cutting the group’s underlying operating margin from 5.9% to 5%.
The company says that profit growth lagged behind sales growth due to the costs involved in setting up several major new contracts. That’s understandable, given that these new contracts are expected to deliver annual revenue of £158m, or around 20% of forecast sales for this year.
My view
Chief executive Alex Laffey expects the investments made in the first half of the year to support strong profits growth during the second half. That sounds reasonable to me.
However, the group’s net debt has now risen to two times EBITDA (earnings before interest, tax, depreciation and amortisation). That’s at the upper end of what I’m comfortable with for a low-margin business of this kind.
When Stobart’s full-year results are published in 2019, I’ll be looking for evidence that cash flow and margins have reversed recent declines. I’d also like to see a reduction in borrowing levels.
Despite these concerns, I believe this could be an attractive long-term income pick. Trading on less than 12 times forecast earnings and with a 4.9% yield, Eddie Stobart’s valuation seems reasonable to me.
Making money from muck
Collecting and managing waste is an essential function in any modern society. I don’t see that changing in my lifetime.
With this in mind, I think that waste management firm Biffa (LSE: BIFF) could be an interesting investment.
Biffa’s revenue rose by 8.8% to £977.7m last year. This increase was split evenly between acquisitions and organic growth. The group’s profit margins were maintained, lifting underlying operating profit by 10% to £81.2m.
Cash generation was also encouraging, with underlying free cash flow improving from £28.8m to £44.4m.
Growth opportunities
As one of the largest firms in this sector operating in the UK, Biffa enjoys economies of scale not available to smaller firms. I feel that this should allow management to expand profitably in areas such as energy from waste and recycling.
Overall, the stock looks quite good value to me, on 12.8 times forecast earnings with a well-covered yield of 2.8%. In my view, Biffa could be a good long-term buy for UK investors.
