It’s understandable if many investors are steering well clear of small-cap stocks right now. The share prices of minnows have a tendency to be more sensitive than established stock market juggernauts from the FTSE 100, even at the best of times. During a crisis like this, the volatility dial is turned up to 10.
That’s not to say there aren’t any great stocks available for those willing to look at the lower end of the market spectrum. That’s particularly so for patient dividend investors.
Hot stock
While clearly not taking into account trading during the coronavirus outbreak, today’s full-year results from Strix (LSE: KETL) demonstrate how solid it is. The company is a kettle safety control designer, manufacturer and supplier and also produces water filtration products.
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Revenue climbed 3.3% to £96.9m in 2019. And the AIM-listed firm continued to boast huge market shares in regulated (73%) and less regulated markets (34%). Pre-tax profit moved 3.4% higher to £30.2m, in line with market expectations.
Away from the headline numbers, it’s pleasing to see that Strix continues to improve the health of its balance sheet.
It saw investments such as the building of a new factory in China and the acquisition of assets from clean water business HaloSource. But its net debt was still cut to £26.3m, a roughly 4% improvement from the end of 2018.
Regarding the coronavirus, CEO Mark Bartlett said the small-cap’s manufacturing operations in China had improved. He said they had “recovered with a c.100% production capacity and operational supply chain which is sufficient to meet customer demand”. That should be hugely reassuring for those (like me) already holding the stock.
As a further sign of confidence in its outlook, Strix stated that it would propose a final dividend of 5.1p. This would bring the total cash return for 2019 to 7.7p per share, a 10% increase on 2018’s payout and covered healthily by profits. Taking today’s share price rise into account, that gives a trailing yield of 6%. Hikes to the cash returns also look likely in the future.
Taking all this into account (and allowing for some bias), I continue to think Strix is an excellent income stock to tuck away for the long term. In fact, it looks something of a steal given a valuation of just 8 times forecast earnings!
Counter-cyclical
Another minnow boasting defensive qualities and a decent dividend yield is insolvency specialist Begbies Traynor (LSE: BEG).
Considering the impact the current crisis is likely to have on UK plc, I suspect the Manchester-based business could be one of few to see an increase in trading over the next few months. Given that the £95m cap remarked that it was already confident of reporting results “at least in line with expectations for the year as a whole” only a couple of weeks ago, that bodes very well for existing investors.
Aside from the potential for capital gains, the small-cap could also be a good source of dividends. If we assume that the analyst predictions are correct, the firm will return 2.8p per share in this financial year (ending 30 April). That translates to a yield of 3.7%.
Stock in Begbies was changing hands for 13 times earnings before this morning. Although there can be no guarantees, that could turn out to be a very reasonable price to pay once the full extent of the damage wrought by the virus becomes clear.
