Sometimes you’ve just got to be patient with stocks. After drifting lower all summer, shares of educational software and services group RM (LSE: RM) rose by 15% in the opening hour of trading this morning.
The group now says its full-year results should be “ahead of expectations”. Although management hasn’t see fit to provide any figures for guidance, I’d expect this to mean that earnings are likely to be 5%-10% higher than consensus forecasts.
If that’s the case, then RM could report adjusted earnings of about 20p per share this year. At the last-seen price of 185p, that would still leave the stock on a modest forecast P/E of 9.3.
Should you rush in and buy?
RM’s last move higher came in February, when it announced the acquisition of Connect Group‘s educational business. This £56.5m deal was quite significant for the group, as the Connect business appeared to have the potential to add around 40% to full-year sales.
The integration of this business appears to be going well. RM said today that expected cost savings are likely to be greater than the £2m originally expected. Trading is also said to have been solid across the group’s other businesses.
Looking ahead
Analysts expect earnings to rise to 21.5p per share in 2018/19, as the full benefits of the Connect acquisition flow through to the bottom line. This puts RM stock on a modest forecast P/E of 8.6, with a prospective dividend yield of 4.4%. I’d continue to rate this stock as an income buy following today’s news.
A 7% yield I trust
A dividend yield of 7.9% without full earnings cover would normally be a cause for alarm, signalling a likely dividend cut. But before dismissing companies with high yields, it’s often work taking a look at the figures.
Just occasionally, these generous payouts can be affordable. In my view, payment processing group PayPoint (LSE: PAY) is a good example of this.
The firm’s recent half-year results showed that profits remained stable during the first half, despite a slight fall in revenue. Underlying operating profit was broadly flat at £24.4m, while operating cash flow — crucial to dividends — rose by 5.3% to £29.5m.
This business has always generated a lot of surplus cash, and these figures suggest to me that this attraction remains.
Although the group’s forecast full-year dividend of 71.4p per share isn’t covered by expected earnings of 62p per share, I expect most of this payout to be covered by free cash flow. The remainder will be funded from the group’s net cash balance of £27.6m, which is gradually being returned to shareholders.
A pure income buy?
The outlook for growth here looks limited. But PayPoint handles a wide range of payments through its corner shop terminals, and in my view this business is likely to have a stable future.
The stock currently offers a forecast yield of 7.8%, rising to 8% for the 2018/19 financial year. As the group’s cash balance falls, these payouts may eventually be cut so that they’re covered by earnings. But even then, I’d expect a yield of around 5%.
I believe this stock has the potential to deliver a 20% cash return in three years. I’d rate the shares as an income buy.