When it comes to investing, value is not just about price. Simply because a share sells for pennies does not necessarily make it a bargain. But this week, I bought one penny share that combines a proven, profitable business with juicy passive income prospects.
Moneymaking company
The share in question is Topps Tiles (LSE: TPT).
Topps is a well-known building supplies provider that has been around for six decades. It has long since proven it can make money by shifting tiles.
Last year, revenues grew 8% to almost a quarter of a billion pounds. Pre-tax profits shrank, but still came in close to £11m. Basic earnings per share of 4.6p means this penny share currently trades on a price-to-earnings ratio of around 11, using last year’s figures.
This year has started less promisingly for Topps. In the first half, although revenues grew 9%, pre-tax profit was down 70% compared to the same period last year.
Despite that, the company reckons a strong second half will help it deliver in line with average market expectations of £11.5m in adjusted profit before tax.
Long-term outlook
But it is not just the short term I consider when investing. Although it has penny share status, I think Topps has the makings of a solid long-term performer.
It has a large network of sites, a deep customer base of trade buyers, and has been investing in its online presence through channels such as Pro Tiler Tools.
The company ended its first half with almost £20m in net cash. That likely means it can continue to raise its dividend in the medium term, even if financial performance is erratic. The interim dividend was boosted 20%, for example, although that was not covered by basic earnings.
Ultimately, to grow dividends, the business will need to deliver strong financial performance. One risk is a weak economy hurting demand. Another is inflation squeezing profit margins at the group.
While these are risks, I think they also help explain why Topps continue to trade as a penny share. I see such risks as priced in already. Longer term, I expect strong demand and inflation to revert to historical norms.
I’ve bought
That is why I decided to add Topps Tiles to my portfolio this week.
I am optimistic it offers me the prospect of long-term capital growth. Meanwhile, the dividend yield is already attractive and I reckon there is scope for further growth in the payout.
Dividends are never guaranteed though. And given the uncertainty surrounding what will happen in the housing market, I do not expect the coming years to be smooth sailing for Topps.
But thinking about the years not just months to come, I think Topps’ expertise and strong market position set it apart from competitors.
The post 7% dividend yield! I just bought this UK penny share appeared first on The Motley Fool UK.
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C Ruane has positions in Topps Tiles Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023
