Sometimes it pays to look outside the blue-chip FTSE 100 index and perhaps even the mid-cap FTSE 250 when searching for attractive investment opportunities. Smaller companies can sometimes achieve faster rates of growth than their larger counterparts, and in rare cases even provide good levels of income.
But, of course, these companies often carry a higher level of risk, so it goes without saying that a more cautious approach is required when looking to invest in lesser-known firms.
Juicy dividends
One such firm that recently caught my eye is Connect Group (LSE: CNCT). The Swindon-based distribution firm operates a number of diverse businesses in areas such as news & media, parcel freight, education and books. These include Smiths News, the UK’s largest newspaper and magazine wholesaling business, and Tuffnells, a parcel delivery business.
Last month the group agreed to sell its Education & Care division to RM plc, the education resources and software group, for £56.5m. The disposal is consistent with the group’s strategy of focusing on growth opportunities within its News & Media and Parcel Freight businesses. Personally I think it’s a good move, as the division has been suffering from a decline in revenues, and was likely to be impacted further by an increase in teacher pension and National Insurance costs that will need to be absorbed by school budgets.
Connect Group also happens to be one of those rare smaller companies that actually rewards its shareholders with generous dividends, rather than ploughing all the profits back into the business. In fact, management has been increasing shareholder payouts for a number of years in line with a progressive dividend policy. Forecasts currently suggest a full-year dividend of 9.8p per share for the current year, equating to a juicy 7.3% yield, with payouts covered two times by expected earnings.
Transformation
If I’m picking out Connect Group for income seekers, then here’s one for growth investors. McBride (LSE: MCB) is the leading European manufacturer and supplier of ‘private label’ products for the household and personal care markets. In essence the company develops and supplies products for sale under retailers’ own brands, variously referred to as white labels, store brands, own labels, distributor brands and discount brands.
After a number of disappointing years, the group entered a transformational phase in 2015, with a new management team taking the business into a fresh strategic direction. The aim now is to maximise McBride’s market-leading position and size to deliver greater value and develop opportunities for further growth.
The strategy seems to be working ,with the Manchester-based business delivering double-digit earnings growth in each of the last two years. Market consensus suggests that there will be more of the same over the medium term. The shares look undervalued trading at 14 times forecast earnings for the current year, dropping to just 12 times for FY 2018.