When investing for income, it’s easy to stick with the usual big-cap names. But history suggests that the best small firms can outperform the market over long periods.
Today, I’m looking at two dividend stocks I think could make good choices for long-term dividend growth.
Out of favour
Shares of car dealership group Cambria Automobiles (LSE: CAMB) have lost 25% of their value over the last two years as new car sales have slowed, placing profits under pressure.
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Today’s half-year figures from Cambria show the impact of this decline. Revenue fell by 4.5% to £295.1m during the six months to 28 February, while underlying pre-tax profit was 14.3% lower, at £4.8m.
Protecting profits
The group is still very profitable and delivered a return on equity of 17.4% during the first half. The board is taking steps to protect the business from a downturn by focusing more heavily on premium brands, such as Lamborghini and McLaren.
This is helping to improve the profitability of each car sold, as more expensive cars generally carry higher profit margins. A stronger focus on used car sales and aftersales is also helping to protect profits.
Although used car sales fell by 0.8% on a like-for-like basis during the half year, profit per car rose by 7.3%. In aftersales, like-for-like revenue rose by 6.1%, generating a gross profit of £13.7m. That’s more than new car sales (£9.7m) or used sales (£11.8m).
A contrarian choice for income?
It’s difficult to know when it’s the right time to invest in a falling market. It may be too soon to buy car dealers, but I think that Cambria could be an attractive choice for long-term investors.
Although the forecast dividend yield of 1.6% is low, it should be covered seven times by earnings. This reduces the chance of a cut and leaves plenty of room for future growth when conditions are more favourable.
Profits are expected to fall by 18% this year, before starting to recover in 2018/19. With the stock on a forecast P/E of 8, now could be a good time to start building a position.
A high yield alternative
If you’re attracted to car dealers’ low valuations but need a higher dividend yield, one alternative is Marshall Motor Holdings (LSE: MMH).
This £130m company has so far managed to buck the trend of falling profits. Underlying pre-tax profit at the group rose by 14.4% to £29.1m in 2017. The group also used £42.5m from the sale of its leasing business to help reduce net debt, from £119m to just £2.2m.
This confident performance supported a 16.4% increase in the dividend, which rose to 6.4p per share last year. At the last-seen share price of 169p, that’s equivalent to a dividend yield of 3.9%. That’s quite high for a small cap.
A second attraction is the group’s large property portfolio. According to Marshall’s 2017 results, it has £116.3m of freehold and long leasehold property. That’s equivalent to around 150p per share, which covers 89% of the current share price.
Like Cambria, Marshall makes more profit from aftersales than new car sales. One appeal of this is that even if new car sales slow, aftersales profits from cars under warranty should remain strong for several years.
Although the automotive sector isn’t without risk at the moment, these shares do seem cheap to me on just 7.1 times forecast earnings. I believe this could be a buying opportunity.
