With share prices falling, investors looking to earn a second income are almost spoilt for choice. And I think RWS Holdings (LSE:RWS) is one that’s well worth a look.
When a stock comes with a dividend yield as high as 11%, it’s always worth asking why. But if the market is making a mistake, the potential opportunity could be massive.
Artificial intelligence
RWS specialises in language translation and the stock is down by as much as 82% over the last couple of years. During this time, sales have gone from £749m in 2022 to £718m in 2024.
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The big question for investors is why? One reason is the rise of artificial intelligence (AI). Cheap (or free) translation systems have put pressure on operators across the industry.
This is a clear risk, but it isn’t the only issue. Part of the downturn is the result of cyclical economic pressures and issues around the integration of an acquisition the firm made in 2020.
Recently however, RWS has been showing positive signs on both fronts. And the market might just be underestimating the significance of these.
Resilience
In terms of AI, it’s worth noting that RWS might not be as easy to disrupt as it seems. It focuses on specialist translations in areas where the cost of a mistake can be extremely high.
These include warnings for industrial equipment, documentation for medical devices, and legal documents like patent applications. In a number of cases, these industries are highly regulated.
That makes cutting corners on costs and ending up with the wrong documentation a big risk. RWS brings specialist technical expertise that other translation systems can’t match.
On top of this, the company is using its specialist knowledge to develop its own AI-based translation systems. And there are signs that these are proving popular with customers.
Resilience
While sales in 2024 were lower than the previous year, there were positive indicators. Revenues started increasing in the last six months and this was driven by the firm’s AI-based solutions.
Investors might see this as evidence that the challenges RWS have been facing in recent years are more temporary than they looked. And then there’s that big dividend.
In 2024, the company generated just under £41m in free cash flow and paid out £45m in dividends. That looks unsustainable, but there’s a catch.
A big part of this was the result of unusually high capital expenditures. With these set to fall in 2025, I think there’s a good chance RWS increases its dividend for the 22nd consecutive year.
Undervalued
I think RWS is a much more resilient business than its current share price gives it credit for. And I therefore see the 11% dividend yield as a real opportunity for investors to consider.
While the rise of AI is a challenge, the company has a differentiated offering. And in highly specialised markets where there’s a lot at stake, the value of this shouldn’t be underestimated.
Share prices are falling across the board at the moment and a recession could maintain the pressure on the business. But I think RWS is a stock to keep a firm eye on.
