While it is possible to find some penny shares that are real bargains, some turn out to be complete duds. Here are two I would happily buy for my portfolio if I had spare cash to invest. Both pay dividends.
Topps Tiles
I already own Topps Tiles (LSE: TPT) but would be happy to ‘Topp’ up my holding!
The company is responsible for one in every five tiles sold across the UK. It also sells other floor coverings. With an extensive network of stores open both to trade and retail customers, a sizeable digital operation and deep market understanding, I think the company is here for the long haul.
There are challenges though. Revenues in the first half slid 6% compared to the same period last year, and before tax the company swung from a £1.7m profit to a £1.5m loss. A weak housing market could see sales fall further if building rates drop.
But as a long-term investor, I think the share is well-positioned. I like its 8.9% dividend yield.
After falling 16% in the past year and 37% over five years, how should I see the share? Is it an overlooked bargain or as a weakly performing business with a share price in long-term decline?
There could be validity in either view. I own the shares and plan to keep holding them because, although the current trading environment is difficult and could see profits fall, I see Topps as well run and smartly positioned to keep a key role in a market I expect to benefit from long-term customer demand.
NWF Group
The business of distributing fuel, food and animal feeds may not be glamorous. But it has other things going for it. As the old saying goes, where there’s muck, there’s brass.
Demand is high and likely to be resilient over the long term. Customer relationships and depot location convenience can give a company pricing power in what initially looks like a commoditised market.
Take NWF Group (LSE: NWF) as an example. The business has been profitable in recent years and last year revenues topped a billion pounds. Yet the market capitalisation of the stock is under £90m.
One reason for that is that this is a high revenue, low profit margin industry. Those 10-figure revenues last year generated £15m in profits after tax, equating to a paper thin net profit margin of 1.4%.
Rising fuel or other costs could eat into such thin margins. Lower demand for domestic heating oils helped push first half profits before tax down 36% year on year.
Despite that, the business has maintained its underlying full-year expectations. The share trades on a price-to-earnings ratio of 6 and offers a dividend yield of 4.4%.
If I had spare cash to invest, I would be happy to tuck a few NWF shares into my portfolio. It is a third cheaper than it was a year ago and I remain upbeat about the business prospects here.
