There are more than a handful of small-cap companies — shares with a market value of under R2bn — on the JSE offering surprisingly big dividend yields.
Some situations look awfully tempting — and these include several microcap shares. Broadcast groups eMedia and African Media Entertainment are on juicy yields of 9% and 11% respectively. Passenger transport group Frontier Transport Holdings is close to 10%, security technology group ISA Holdings on 12%, tiny furniture retailer Nictus on 8%, specialist retailer HomeChoice on almost 7% and metals group Insimbi Group on 7%.
Technology services group PBT, which has been quite keen on special dividends, sits on a yield of almost 20%, having returned R400m to shareholders since 2019 against a market value of R768m. A 25% decline in the share price this year, however, suggests distributions might not be as generous as before in the short term.
These compare favourably with real estate investment trust Spear, a small cap which sits on a historic yield of almost 10.5%.
Some circumspection is needed when perusing historic high yields. Controversial technology hub Ayo sits on an eye-popping yield of 71%, for example
But some circumspection is needed when perusing historic high yields. Technology hub Ayo Technology Solutions sits on an eye-popping yield of 71%, for example. Ayo paid the bulk (if not all) of its generous dividends from cash raised at its controversial listing, with operations trading mostly in the red. Unless Ayo spins operational cash flows, the dividend flows will unceremoniously stop.
Renewable energy investor Mahube Infrastructure suddenly stopped paying dividends this year after the weather stopped playing ball, becalming cash generation at its portfolio of wind farms. Security barrier business Trellidor, which taps a sweet spot amid South Africa’s high crime rate, unexpectedly hit a few snags in recent years to halt previously attractive dividend flows. The four financial years until the end of 2012 saw Trellidor pay out a collective 56c a share — and then nada.
Even regular dividend payers need to be reassessed. Older readers will remember horse-racing and gaming group Phumelela Gaming trotting out sumptuous dividends before suddenly collapsing under a heap of debt. TeleMasters, a small telecommunications play that pays quarterly dividends, has seen its payouts whittled down to fractions of late.
As a general rule of thumb, investors should not buy equities for yields. But it’s not easy to look away from well-established and perennially profitable smaller businesses yielding 6%-8% on low single-digit earnings multiples.
Genuine small-cap companies might not usually be associated with regular and rich dividend declarations. Most would still be inclined to reinvest their cash to beef up operations or broaden their business with acquisitions, or buy back their undervalued shares.
Of course, there are broader investing considerations too. Playing the small-cap yield game when interest rates on simple saving accounts are at multiyear highs, and with bond rates still looking interesting, might seem laced with unnecessary risk.
But if dividend flows are sustainable, more than a handful of stocks could make interesting prospects when the interest rate cycle starts reversing, possibly as early as mid-2024.
While you are not sticking to the book on prudent investing, you would be a flipping fool not to cast your eyes over some of these small-cap opportunities
As an asset manager who asked not to be named remarked: “While you are not sticking to the book on prudent investing, you would be a flipping fool not to cast your eyes over some of these small-cap opportunities.”
Still, Integral Asset Management chief investment officer Keith McLachlan cautions that “simplistically buying equities for yields is like picking up pennies in front of steamrollers”.
He says that unlike fixed-income preference shares that have yield obligations to be paid, equities don’t. “So even if a company can be paying a good historic dividend, something can happen, or the board can just change the capital allocation priorities and the dividend yield will evaporate very quickly.”
Titanium Capital founder Charles Boles says small-cap dividend plays should come with a health warning. “Often there is concentration risk [in terms of the operational profile], and it’s often difficult to get a clear line of sight as to how sustainable a business is.”
Boles argues small-cap yield-seekers might be better served looking at larger, better-established and more diversified plays such as Caxton & CTP, Afrimat, Tsogo Sun, Hudaco Industries, Invicta Holdings, Combined Motor Holdings and Spur Corp.
Picking a portfolio of small-cap yielders, notwithstanding the health warnings above, would require some longer-term fortitude from investors. Diversity would be key to a decent dividend outcome — and that would include looking at stocks not making distributions at present (such as gaming-aligned RECM & Calibre, car rental business Zeda and revamped investment counter Rex Trueform Group).
The FM would consider the following 10 prospects:
African Media Entertainment
This radio broadcasting group is a strong cash generator with no major cash reinvestment needs. AME operates in a good niche (mainly regional and specialist radio stations) and is a tightly run enterprise. Collective dividends since 2018 top R10 a share compared with a current share price of R32. There’s no reason to compromise on the present payout trend and a 100c a share interim dividend points to another decent distribution this financial year.
Transpaco
This packaging group operates in robust niches, some of which were given up by Nampak many years ago. Transpaco is reassuringly lean and mean with strong cash flows that can accommodate share buybacks and selected acquisitions, and still fund a generous payout to shareholders.
ISA Holdings
Only a handful of years ago, this technology security firm was firmly backed up against the wall when its main agency agreement was altered into an unviable arrangement. Thanks to loyal customers, a switch to new licence agreements was well managed and ISA is back on a profitable track. The business paid out all its earnings in dividends in the last reporting period — a huge sign of confidence from the CEO, who is also a major shareholder. Of course, it’s a business with a singular operational focus which, as we have seen, does carry risks.
4Sight Holdings*
This microcap, which plays in the fourth industrial revolution space, had a shaky start as a listed company. The share price was smashed and even briefly suspended as corporate governance issues were sorted out. But the vendors of mainstay businesses into the listed company have taken charge and the group put out some satisfactory interim numbers, backed by fair cash flows. Directors were confident enough to declare a fairly generous half-year dividend. It might be worth waiting for March next year to see if the turnaround trend has traction.
Frontier Transport Holdings
This group’s main subsidiary, Golden Arrow Bus Services, ferries a sizeable chunk of Cape Town’s population to work and back home every week. It’s an essential service to the local economy and is premised on affordability, reliability and safety. The business is managed by smart operators that allocate capital prudently (such as going gently into electric buses). Cash flows are strong, helped quite a bit by a state subsidy. With no real opportunities to make a big acquisitive splash, the dividend engine should keep revving for at least the medium term.
Metrofile
The company delivers another essential service in document storage, which these days includes cloud-based applications over and above traditional paper-based storage. Solid rather than exciting — but almost no doubt about dependable dividend flows.
Primeserv
Temporary employment and recruitment businesses carry a bad rap thanks to the government’s labour legislation. Primeserv, which services mainly the blue-collar segment, has chugged on to build a solid profit track record. Dividends in the past five years collectively total 27.5c a share, with the latest yield sitting at 6.5%. There seems scope to ratchet up distributions markedly in the years ahead. There is a meaningful R143m sitting in trade and other receivables. But the company recently forked out R11m for assets in logistics, transportation and distribution. Whether further acquisitions to diversify from temporary employment and recruitment are being considered is something to weigh up in terms of future yields.
Nu-World Industries
The 4.8% yield might not be that startling, but the value of Nu-World’s net cash pile is almost equal to its current market value. Operations — which span mostly electronic consumer goods — have undergone a tough couple of years, especially in South Africa. Nu-World remains a well-run, no-frills and cash-generative business with a decent rand hedge element. When the good times return, there could be an opportunity to open the dividend taps.
Vunani
This almost-forgotten financial services counter, founded by empowerment pioneer Ethan Dube, has started to get its mojo back. Vunani operates in specialist niches, some of which offer reassuring annuity flows. Recently resumed dividends have been fairly generous and will hopefully prove sustainable too.
Brimstone
Brimstone might not commonly be viewed as a dividend play, even if it has taken considerable pride in returning cash to its many community-based shareholders over the past two decades. The problem for this enduring empowerment company is the chunk of debt-at-centre and an inability to sell off fringe and smaller investments to cull its borrowings. This can and will change as empowerment lock-ins end. With two cash-generative assets in fishing companies Oceana and Sea Harvest as anchor investments, a debt-light Brimstone could be a much defter distributor.
* The writer holds shares in 4Sight Holdings
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