Stocks with high yields and genuine growth potential are quite rare. But they do exist and they can be a great way to identify stocks with multi-bagger potential.
One example is Morses Club (LSE: MCL). This is a small-cap financial stock which floated in 2016 with the backing of fund manager Neil Woodford, whose funds own 8% of the stock.
It operates in the sub-prime credit market as a doorstep lender — or a Home Collect Credit provider, as the company prefers to describe it. Some investors may be unhappy about putting their money into this sector, but this appears to be a well-run business with several attractions for shareholders.
Growth + cash
The firm’s net loan book rose by 7.7% to £61.2m last year, as customer numbers rose by 9% to 216,000. This increase in lending was mirrored by a 7.7% increase in pre-tax profit, which rose to £11.2m.
In its first year as a public company, Morses declared dividends totalling 6.4p per share, giving a trailing yield of 5.2%. The majority of this payout was backed by underlying free cash flow of £7.1m, although not quite all of it.
The big risk for investors in this type of business is that the bad debt levels will rise, leaving the lender with big losses. The company’s impairment rate was 16.8% last year, measured as a percentage of credit issued. This was a slight increase from 15.4% during the previous year.
Based on these metrics, bad debt doesn’t seem to be a particular problem at the moment. Neil Woodford certainly doesn’t appear to think so. He’s gone public with his view that the UK economy is likely to remain stable and that domestic stocks offer opportunities for investors.
If Mr Woodford is right, then I believe Morses Club could do well. Earnings per share are expected to rise by 40% this year. The stock looks cheap on a forecast P/E of 10.8, with a prospective yield of 5.6%.
A super ‘sleeper ‘?
You may not have heard of Midwich Group (LSE: MIDW). But if you work for a big company, you may be one of the firm’s customers. It sells electronic visual equipment such as projectors, big televisions and printers to corporate customers, including many blue-chip names.
This AIM-listed business only floated last year, but has a market cap of £262m and annual sales of nearly £400m. Adjusted pre-tax profit rose by 23% to £17.9m in 2016, while the group’s operating margin remained stable at 4%.
The main growth opportunity appears to be expansion overseas. As a distributor, Midwich doesn’t have large stockholdings or manufacturing costs. This means it can expand relatively cheaply, reducing the risk of entering new territories.
This strategy seems to be working well. Non-UK and Ireland sales now account for 33% of revenue and are growing fast. Sales rose by 39.3% in France last year, by 26% in Germany and by 42.8% in Australasia, for example.
City analysts appear to be confident that the firm’s strong performance will continue. Consensus earnings forecasts for 2017 have risen by 15% to 19.7p per share since last July. The stock now trades on a forecast P/E of 17 with a prospective yield of 3.5%. I believe further growth may be possible from this level.