Topps Tiles (LSE: TPT) is a name you may be familiar with. What you may not know is that this established business trades for less than £1 on the FTSE Alternative Investment Market (AIM), making it a penny stock. It also possesses a huge dividend yield of over 7%, which is only one of the reasons I will be adding some shares to my holdings imminently.
Tile specialist
Topps Tiles is the UK’s leading tile supplier with over 300 stores nationwide and an online presence too. With origins stretching back over 50 years, the business has grown over time to become one of the market leaders in its industry.
Topps shares are up 20% over a 12-month period. As I write they’re trading for 47p, whereas this time last year they were trading for 39p. I believe promising trading results and a solid balance sheet have propelled the shares upwards.
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Risks to note
There are two main issues I can see that could impact Topps negatively. To start with, it could experience less demand for its products due to the current cost-of-living crisis. Consumers are more concerned with rising food costs, energy bills, and increased mortgage payments, and may wait to undertake major home renovations.
Next, with inflation rising, as well as the cost of raw materials required to produce its tiles, Topps could find itself paying higher prices for its products. This could squeeze profit margins and returns. It could increase its prices but then it risks driving customers to seek cheaper alternatives elsewhere.
A top penny stock I’m buying
Let’s move onto Topps’ bullish factors then. As I mentioned earlier, the passive income opportunity is excellent. A dividend yield of over 7% for a small cap is rare. I do understand that dividends are never guaranteed. My confidence in sustained and consistent returns is linked to Topps’ growth journey to date and performance history. Past performance is no guarantee of the future, but the company has increased revenue and profit in each of the last two years, since the pandemic.
Next, Topps’ market position is an enviable one. Its large store network, coupled with it being a retail favourite for tiles and a loyal trade customer base, should allow it to perform consistently and grow.
Finally, in the most recent results, it had £20m net cash in the coffers. This tells me it has the liquid cash to navigate any stormy waters, as well as invest in growth aspirations too.
To summarise, I believe Topps will be an excellent long-term addition to my holdings. I invest to hold for the long term and I understand there may be some short-term issues linked to the current macroeconomic outlook. I expect handsome returns over time.
