A penny stock that is trading at dirt-cheap levels, offering an enticing dividend yield, coupled with a significant market share in its respective sector is a rare find. I believe I have found a stock in Smiths News (LSE:SNWS) that ticks all the above boxes. Should I buy the shares or is it too good to be true? Let’s take a closer look.
Newspapers and magazines
It is worth remembering that a penny stock is one that trades for less than £1. Smiths News is a UK-based wholesale distributor of published content such as magazines and newspapers.
So what’s happening with Smiths shares currently? Well, as I write, the shares are trading for 32p. At this time last year, the shares were trading for 38p, which is a 15% drop over a 12-month period. Many stocks have pulled back since the turn of the year due to macroeconomic headwinds and the tragic events in Ukraine.
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The bull and bear case
Let’s start with some positives first. I noticed that Smiths has an over 50% share of the market in the UK for the distribution of newspapers and magazines. This significant advantage over competitors should allow it to perform consistently and offer generous returns.
Looking at Smiths’ fundamentals, it does just that. Firstly, the shares offer a dividend yield of over 7%. This is rare in a penny stock and Smiths yield is higher than the FTSE 100 average of 3%-4%. I am aware that dividends can be cancelled at any time, however. Furthermore, Smiths shares look dirt-cheap on a price-to-earnings ratio of just three at present levels.
Although performance remains consistent over the past few years, revenue and profit has been falling slightly — but more on that in a moment. I note that Smiths has undertaken massive cost-cutting exercises to continue being profitable and generating healthy volumes of cash. This could also result in further dividends.
So to the negatives then. Smiths operates in an industry that is declining due to the rise and popularity of technology. Many of us access news, magazines, and much more on smartphones and other devices. The traditional paper and its volumes are declining. This is reflected in its declining performance noted above. Smiths knows this too which is why it is cutting costs due to falling demand.
I believe the eventual decline towards minimal levels of newspapers and magazines that need distributing will hamper Smiths business. This will impact performance, returns, and investment viability. This is a concern for me as I like to invest for the long term.
A penny stock I’d avoid right now
Based on my investment strategy of buying stocks for the long term, I’m not convinced that Smiths News is right for me and my portfolio. I think the eventual shrinkage of the magazine and newspaper business will see Smiths shares fall by the wayside.
The only way Smiths could continue its current momentum is if it finds an alternative way to make money and boost growth and performance. I would not buy the shares today, but will keep a keen eye on developments.
