I’ve long had my eye on Photo-Me International (LSE: PHTM) as a potential income investment for my portfolio.
The reason I like this business so much is that it has all the hallmarks of a tremendous long-term income play.
Cash cow
For starters, the company is a cash cow. Over the past six years, the group has generated an average annual free cash flow per share of 3.6p or £13.6m. In recent years, the amount of free cash flow generated from operations has declined due to high levels of capital spending, but it looks as if the company can more than afford the additional capital outlay.
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At the end of 2018, Photo-Me had a robust cash balance of £25m. I expect this total to increase for fiscal 2019 because today the company announced that it had sold its investment in Stella Technologies SA, a Paris-based European Biotechnology company, for a total of €7m including repayment of various loans. The holding was acquired for a total consideration of €1.5m, so it looks as if the company has achieved a high return for shareholders over the holding period.
That being said, current City projections are calling for a slight decline in the firm’s per share dividend distribution this year. A full-year payout of just 8.1p is expected, down 4.2% (although the half-year distribution has already been hiked by 20%). This is disappointing as over the past five years the payout has grown at a compound annual rate of 23%.
Still, investors can’t grumble because today the shares support a dividend yield of 6.6% and trade at a modest P/E of 12.9. In my opinion, a fair price to pay for dividend champion Photo-Me.
With its cash-rich balance sheet and fat profit margins of more than 20%, this dividend stock looks to me to be one of the most attractive on the market.
Rebuilding the business
Another income stock I have my eye on today is Dixons Carphone (LSE: DC).
Dixons is a classic contrarian income play. The stock has come under pressure over the past 12 months as management has tried to restructure the business. The firm’s business model is built on selling mobile phones to customers on multi-year contracts on behalf of mobile providers. This business is lucrative, but it exposes the company to a great deal of credit risk.
As the consumer environment changes, Dixons is having to change its operating model and profits are falling. For the 2018 financial year, earnings per share (EPS) declined 18%, and the City is calling for a further 22% decline this year.
However, despite the company’s bleak earnings outlook, I’m optimistic on the outlook for its dividend. The payout, which is currently 11p per share, gives a dividend yield of 6.8% and is covered 1.8 times by EPS.
And even though Dixons’ earnings are set to fall in fiscal 2019, the stock looks dirt cheap. It is currently changing hands for 7.8 times forward earnings, which I reckon gives an attractive margin of safety, especially when the rest of the UK retail industry is trading at a multiple of more than 10 times earnings.
The combination of a low valuation, as well as a market-beating dividend yield, lead me to conclude that it could be a great addition to any income portfolio.
