I’ve now found two more that I’m considering adding to my portfolio with a spare £1,000. Let’s take a closer look. 

Impressive earnings growth

The share price of dotDigital (LSE:DOTD) has plummeted 68% over the past year, having fallen 16% in the last three months. Currently trading at 77.4p, it’s in prime penny stock territory.

The firm – a software platform provider for the marketing industry – has enjoyed stellar earnings growth over the past five years. 

Between 2017 and 2021, earnings per share (EPS) rose from 2.47p to 4.12p. By my calculation, this means that the business has a compound annual EPS growth rate of 10.8%. The AIM 100 index firm has clearly been growing profits at a fast pace over that time period.

For the year ended June, between 2020 and 2021, pre-tax profit was pretty flat, with a slight increase of £600k. 

The business has also recently signed a two-year deal with online security giant Adobe. This has the potential to promote dotDigital’s brand over the next couple of years. 

There is, however, the risk of a slowdown in the software-as-a-service (SaaS) sector following heightened demand during the pandemic. This may be compounded by the pressures of rampant inflation.

Consistently profitable

I’m also attracted to Pan African Resources (LSE:PAF) for its impressive earnings growth. It currently trades at 19.78p.

Between 2017 and 2021, EPS increased from 2.6p to 3.87p. This results in a compound annual EPS growth rate of 8.3%. 

For the year ended June, between 2017 and 2021, the company’s pre-tax profits also grew from £44.9m to £104.8m. While past performance is not necessarily indicative of future performance, these figures suggest that the business has been, and may continue to be, consistently profitable.

In April, the firm – a gold miner operating in South Africa – initiated a share buyback scheme worth £2.6m. While this may seem small, it’s still encouraging to see an AIM 100 stock embarking on such a plan. It’s yet another indicator that Pan African Resources is in a good financial state.

The company is commencing further drilling at its flagship Barberton Mine in South Africa, while starting exploration activities in Sudan.

There is always the risk, however, that future pandemic variants halt mining operations. 

Overall, these two firms have displayed strong and consistent earnings growth over the past five years. While there are risks, I will be using my £1,000 to add both businesses to my portfolio to hold for the long term. 

#1: Pendragon

The first company is Pendragon (LSE:PDG), an online new and used car retailer. It currently trades at 24.9p. 

Between 2020 and 2021, this business swung from a loss before tax of £25.5m to a profit before tax of £78.6m. 

This is encouraging and suggests that it has rebounded strongly from a tough time during the pandemic.

What’s more, revenue grew from £2.7bn to £3.4bn over the same period. 

Investment bank Berenberg increased its price target in March from 30p to 36p. This was chiefly because the 2021 results were slightly ahead of guidance. 

Despite this, there are potential future supply chain problems as the company emerges from the pandemic.

#2: Costain

Secondly, Costain (LSE:COST) is in prime penny stock territory. It’s currently trading at 42p and is a construction business. 

Between 2020 and 2021, this company narrowed its losses significantly. These shrank from £96.1m to just £13.3m.

In addition, revenue increased from £978m to £1.1bn. Furthermore, operating margins improved to -0.8% in 2021, up from -9.4% the previous year.

It should be noted, however, that past performance is not necessarily indicative of future performance.

With an order book of £3.4bn, the firm could be in great shape moving forward.

There are risks, however, with inflation and rising commodity costs potentially eating into future profit margins and impacting balance sheets.

#3: Pan African Resources

Finally, I’m looking closely at Pan African Resources (LSE:PAF), a gold-mining business operating in South Africa.

For the year ended June, between 2017 and 2021, profit before tax increased from £44.9m to £104m. In addition, revenue more than doubled from £125m to £368m over the same period.

Recently, the Sudanese government granted the company five exploration licenses. These cover an area of 1,100 square kilometres.

For the six months to 31 December, the company reported record gold production of 108,000 ounces and initiated a one-month share buyback scheme in April, worth £2.6m.

There’s always the possibility, however, that any future pandemic variant could halt production at the firm’s gold mines.

Overall, these three penny stocks could provide excellent growth opportunities. While there are risks associated with each company, I think their respective historical financial results are strong. What’s more, future operating environments for each firm look attractive over the long term. I will be buying shares in the companies soon.

Severfield

Severfield’s share price closed at its cheapest since November 2020 in recent days. And despite some light dip-buying, the fabricated steel manufacturer still looks mega cheap on paper. Severfield now trades on a P/E ratio of 9 times. It’s a reading I believe more than reflects the dangers it faces as soaring inflation and sanctions on Russia threaten the global economy.

You see, I think Severfield’s profits could rocket over the next decade as infrastructure spending heats up. The business sells it structural steel in Europe and in India, too, a market where urbanisation rates are soaring and wealth levels are increasing rapidly. Severfield’s steel is used in a wide variety of applications from bridges and train stations to hospitals and stadiums.

Pan African Resources

I think gold prices could continue to run higher as inflation rockets, the tragic events in Ukraine escalate, and Covid-19 cases rise sharply in parts of Europe and Asia. This is why I’d use Pan African Resources’ (LSE: PAF) fall from 14-month highs as a chance to invest (though its still up almost 40% on a five-year basis). Recent weakness leaves the South African gold producer trading on a prospective P/E ratio of just 6.3 times.

Bullion prices have retraced back below $2,000 per ounce following a recent surge towards new record highs. But many analysts are tipping a fresh charge as the macroeconomic and geopolitical landscape worsens, with some even predicting a rise to $3,000.

I’d buy Pan African Resources to try and capitalise on this opportunity. This is a risk though as asset prices prices can of course go up as well as down. Any appreciation in the US dollar, for instance, could pull precious metal prices lower and with it the share prices of mining shares like this.

Photo-Me International

Photo-Me International also trades on a rock-bottom earnings multiple today (in this case a figure of 7.7 times). This penny stock is perhaps best known for the photo booths found in shopping centres, train stations and other public places. It is therefore vulnerable to a fresh shock to the global travel industry that diminishing consumer spending power and rising aviation costs present. In this scenario, demand for passport photos would fall through the floor.

However, as a long-term investor I think Photo-Me’s an attractive buy at current prices. The business operates some 45,000 self-service machines across the globe. These include photo booth, washing machines and food vending machines. And demand for these sorts of technologies is tipped to soar due to changing consumer habits following the coronavirus and soaring retail staff costs. Allied Market Research thinks the self-service technology market will expand at a compound annual growth rate of 10.6% between 2021 and 2030.

A high-growth penny stock miner

Miner Jubilee Metals (LSE: JLP) could well benefit significantly from a rise in commodities, especially from increased demand for copper as a result of an electric car boom. Electric cars use huge amounts of copper so there will be ongoing demand for this commodity. Jubilee has ambitions to process 25,000 tonnes of copper units per annum.

The biggest risk with this share is that its mines are in countries that face more political and social instability than many others. The mines are mostly in Southern African countries, including Zambia and South Africa.

But the miner has a number of treatment plants and operations so isn’t reliant on any one location, unlike some other listed miners. It also processes a number of different commodities so isn’t fully dependent on the price of any single commodity, which I think is positive for the investment case.

Overall with a P/E of just nine, the shares represent decent value given rapid revenue growth in recent years. But it should be borne in mind that it doesn’t pay a dividend.  

If I didn’t already own Sylvania Platinum, I’d be tempted to add Jubilee Metals to my own investment portfolio. I think it looks like a high growth miner with good operations and a lot of potential. With a share price of 16p, Jubilee is a penny stock I really like.

Panning for gold

Pan African Resources (LSE: PAF), the South African gold miner, released very positive results on 16 February. The results showed gold production was up in the first half, along with a rise in cash and profit after tax, while production costs declined. All in all a very pretty picture.

Again, like Jubilee, Pan African is at the mercy of South African politics, which may put some investors off buying it. It’s also clearly reliant on the gold price, which can fluctuate, so revenue and profits aren’t the most consistent. The share price has never tended to show any sustained growth.

All that aside, there are reasons to think that Pan African is a very decent growth and income share. Operating profit went from £15m in 2018 to £112m in 2021. The dividend yield is 4.2%, which is very good. When this is combined with a P/E of seven, giving it a very cheap valuation, there’s a lot to like, so I’m considering buying shares in this gold miner. Inflation might give the share price another boost.

A drinks giant

Diageo (LSE: DGE) has always been one of my favourite UK shares, with its reputation for excellence and significant brand loyalty. Indeed, Diageo owns over 200 different alcoholic brands, such as Guinness, Gordon’s, and Johnnie Walker. Due to the prominence of these brands, Diageo can rely on recurring sales, alongside some organic growth.

In fact, in the recent FY22 half-year results, Diageo managed to record net sales of £8bn, representing organic growth of around 20%. Organic operating profits were also to grow 24.7% to £2.7bn. Considering the worries surrounding cost inflation and supply chain constraints, these were incredibly strong results. It also allowed the company to increase the interim dividend by 5%, giving it a yield of around 2%.

There are some risks with the shares, however. For example, cost inflation is likely to increase capital expenditures, and this may strain profit margins. Supply chain constraints may also limit the company’s ability to meet demand for its products. Nonetheless, I remain confident in the future. Indeed, over the medium term, from FY23 to FY25, it expects organic operating profits to grow sustainably within a range of 6% to 9%. The company’s share buyback programme, where it plans to return £4.5bn to shareholders, is also likely to have positive effects on the Diageo share price. For these reasons, Diageo is a ‘no-brainer’ buy for me.

A lesser-known UK share

In contrast to Diageo, Pan African Resources (LSE: PAF) doesn’t receive much attention. Despite this, the gold miner is performing excellently. In fact, in the most recent full year trading update, it recorded profits after tax of $74.7m, which is a 69% increase from the year before. It also sports a dividend yield of over 5%, far higher than most other UK shares.

Things are also going extremely well in the latest half-year. In fact, the company managed to produce 108,000 ounces of gold in the six months ending December 2021, which is a record amount for the company. It also exceeded previous guidance of 105,000 ounces. Further, the company announced a further reduction in net debt, a factor which may allow further increases in the dividend.

Despite this, PAF is extremely reliant on the price of gold, which is entirely outside of its control. This is a risk that faces the company. But that’s not stopping me from buying. Due to the current inflation rates, I feel that gold has further to rise. As a top-class gold miner, PAF is, therefore, another UK share I’d buy with £1,000.

A great many low-cost stocks like these can also be considered less financially robust than larger-cap companies. This can significantly limit profits growth and even threaten a firm’s existence if trading conditions suddenly worsen.

However, these characteristics don’t apply to all penny stocks. But as a long-term investor, the prospect of temporary share price choppiness isn’t enough to put me off. Some quick research will allow me to avoid shares with weak balance sheets as well.

Here are three dirt-cheap penny stocks with big dividends I’m considering buying today.

Looking good

Lookers’ profit forecasts in 2022 could take a significant whack if chip shortages continue to damage new car production. But from a long-term perspective, I think the car dealership has a lot going for it. Worsening fears over the climate emergency means sales of electric vehicles (EVs) looks set for strong and sustained growth.

Don’t forget too that the government is set to phase out sales of new petrol and diesel cars in 2030. This could exacerbate interest in EVs towards the end of the decade. Today, Lookers trades on a forward P/E ratio of 7 times and boasts a chunky 4.2% dividend yield.

Topp of the world

Topps Tiles meanwhile deals on a bargain-basement P/E ratio of 10.8 times for this financial year. It carries a 4.8% dividend yield as well. I’d buy it because the British housing market should remain strong and so will wall and flooring product demand from homebuilders. Moreover, I’m tipping sales to keep rising amid a healthy repair, maintenance and improvement (RMI) market.

Topps Tiles’ latest financials showed sales up 1% in the 13 weeks to 1 January. This was despite the blockbuster comparatives a year earlier. Revenues were also up a mammoth 21% from the same 2019 period. I’d buy this penny stock even though runaway inflation could hit consumer confidence hard and, by extension, tile sales.

5.6% dividend yields

Speaking of inflation, I believe grabbing a slice of the gold market’s a good idea as costs soar. I’d do this by buying a UK bullion-producing stock rather than the metal (or a metal-backed financial instrument) as this way I can receive dividends while riding an increasing commodity price. Pan African Resources and its 5.6% dividend yield have caught my attention today.

There’s no guarantee that gold prices will rise, of course. Central bank interest rate hikes and a related rise in the US dollar could put paid to that. But the rate at which global inflation is booming — and importantly well beyond many broker forecasts too — suggests that profits at gold diggers like Pan African Resources could surprise to the upside. This penny stock trades on a forward P/E ratio of 5.5 times today.

Early stages of development

Greatland Gold (LSE: GGP) is an interesting case because it hasn’t actually started making any revenues yet. Instead, the gold miner is still in its exploration stages, and no mining has commenced. This process seems to be going very well, however, hence the reason for the company’s £600m valuation. Indeed, at the company’s flagship Havieron deposit, it is estimated that there is as much as 4.2m ounces of gold. This means that the company’s potential is massive.

However, the GGP share price has been falling recently and is currently 35% lower than at this time last year. This is partly because the price of gold has fallen to around $1,850 per ounce, far lower than the $2,000 it hit last year. Further, many investors have used last year’s incredible rise to bank profits.

Recently, the penny stock has fallen further, thanks to an equity raise. Indeed, the company issued 82,000,000 shares at 14.5p, a 10.5% discount to the closing price on 17 November. Through this equity raise, the company has raised £11.9m, which will be used to speed up the development of the Havieron gold deposit and be used for working capital. Overall, while I am slightly concerned that this equity raise occurred because GGP was running out of cash, of which it had £6.2m as of 30 June 2021, I still believe it is good for the long term. This is because it will hopefully allow it to start mining quicker.

As such, although there are several risks in buying a pre-revenue company, I feel that GGP’s potential is hard to ignore. Therefore, I may buy more shares while it’s priced at around 15p.

A slightly more developed penny stock

Pan African Resources (LSE: PAF) is another gold miner, yet one which is actually making profits. And with gold priced significantly higher than it was pre-pandemic, these profits have been growing. In fact, in the most recent full-year trading update, it recorded profits after tax of $74.7m, an 69% increase from last year. This enabled it to announce a record dividend of 0.916p per share, equivalent to a yield of around 5%.

Largely due to fears about inflation, the price of gold has also been able to rise recently, and there are some hopes that it can re-reach last year’s prices. This would have a majorly positive impact on the PAF share price.

But like many other penny stocks, there are of course risks. For one, mining in South Africa has had a turbulent history, with strikes and miner deaths common. Two years ago, PAF even had to halt production for a few days due to protests. This is a risk that must be considered with any mining company, and it’s no different for PAF.

Nonetheless, I’m still confident in the company’s prospects, which is why I originally bought shares. At a price-to-earnings ratio of around seven, the shares are also cheap and therefore, I may buy more.

Why I think this penny stock’s price could double

Taking a price to earnings (P/E) ratio of eight, which would still make the shares ‘cheap’ by conventional standards, and then taking the estimated earnings per share for 2022 of 5.18p, I calculate we can get a target share price of 41.5p (that is, eight times the EPS), or thereabouts. The estimated earnings per share figure comes from analysts at Edison. Incidentally, they value the shares more conservatively at around 28.04p. Even on that more conservative target price, there’s still potential for the stock to almost double in value.

Admittedly my calculations are for a best-case scenario as they would require the share price to hit an all high time – and by quite some margin. But here’s why I think the shares could possibly re-rate and achieve a higher valuation.

Getting more value and a higher share price

Edison predicts that PAF’s revenue will go from US$218.8m in 2018 up to $340.9m in 2022. Profit before tax over the same period should grow from $37.1m to $144m. This performance should in itself lead to a higher valuation than Pan African Resources currently has.

While UK miners generally have low P/E ratios right now, that’s not the same for overseas-listed gold miners. Barrick Gold has a P/E of around 13. I feel that puts Pan African Resources’ low P/E, which is currently four, into perspective. Newmont, listed in the US, has an even higher rating at 15. Even UK-listed Centamin has a forward P/E of 10. Going back to my share price target, I think this shows a P/E of eight is realistic. 

In recent results for its financial year ended 30 June, Pan African Resources reported a 12% increase in gold production to 201,777 ounces. That followed 179,600 ounces of gold mined in 2020. So the direction of travel is good and it’s operating well. 

Falling debt at the firm should also help boost the future earnings per share as less revenue goes towards debt repayment.

Of course, things may not turn out the way I hope or analysts expect if the gold price falls. It’s worth me keeping an eye on that. But gold is often seen as an inflation hedge (that is, a good investment when inflation is rising), so my bet is on gold prices rising and demand increasing. Another risk is that by being based in South Africa, investors may punish the shares for any political volatility there. That could hold back the share price.

As with any share, things could go wrong and the share price could fall. Though over the next 15 months to two years, I really think Pan African Resources penny stock has a chance of doubling in value. That would be a great return and so I’m keen to add it to my portfolio.

I’ve been keen on PAF for a while. Its shares were trading as high as 26.5p early this year and I think the current price is a good opportunity for me to buy. Meanwhile, recent developments at SUPP have persuaded me to add it to my buy list for the first time.

Assets and risks

PAF describes itself as a “safe, high-margin and long-life South African-focused gold producer”. Its current producing assets are Barberton Mines (comprising three mines), Barberton tailings retreatment plant, Evander Mines’ 8 Shaft Pillar, and Elikhulu tailings retreatment plant. It also has two major near-term development projects.

Operational setbacks are often a risk with mining companies, but I think PAF’s multiple assets help mitigate this risk. Licensing and labour disputes are also risks. I like that Barberton Mines’ mining rights have recently been renewed for a further 30 years, also that it’s successfully concluded multi-year wage agreements with the two unions that represent the majority of employees.

This penny stock is delivering

In recent results for its financial year ended 30 June, PAF reported a 12% increase in gold production to 201,777 ounces. It also posted a record profit after tax of $75m and a highest-ever dividend of 1.26671 cents (0.91556p). The dividend may not sound much, but remember, this is a penny stock. The yield at the current share price is 5.7%. I think this is very attractive, and see a valuation of 5.7 times earnings of 3.87 cents (2.8p) as appealing too.

Additionally, the board has approved the start of a share buy-back programme. Details on this are to come, but it’s a further reason for me to buy PAF.

Destruction of value

When Neil Woodford’s eponymous investment trust reported maiden results in 2015, net asset value (NAV) per share stood at 102p. By October 2019 — when the disgraced Woodford resigned and the board announced Schroders would be taking over as investment manager — NAV per share had declined to 63p. The trust was also burdened with a £111m bank overdraft.

It was renamed Schroder UK Public Private Trust and the new managers set about clearing up Woodford’s mess. Asset sales and write-downs of holdings on the books at elevated valuations have been the order of the day. However, I think things are looking up.

Can this penny stock deliver?

I was encouraged by the trust’s half-year results earlier this week. The bank overdraft has finally been repaid and there have been positive valuation events at several investee companies. Furthermore, management has been able to make new investments for the first time. It’s taken stakes in private companies Tessian (cybersecurity) and Revolut (neobank). And it made an initial investment in FTSE 100 chemicals specialist Johnson Matthey.

Period-end NAV per share was 40.65p, while the shares are currently at a 19% discount. There’s still a risk of some write-downs. There are one or two holdings whose valuations look dubious to me.

However, I reckon the worst is over and the trust could benefit from both an improving performance and a narrowing of the discount. This may not happen if write-downs persist and investor sentiment weakens. But on balance, I think now could be a good time for me to buy.

Trading update

Yesterday’s trading update was excellent, and although the stock rose around 4%, I think there’s plenty more to go. In fact, due to an increase in gold production, to over 200,000 ounces, the company saw record annual profits after tax of $74.7m. This is a 69% increase from last year.

In addition to the healthy profits that were generated, PAF was also able to reduce net senior debt by 46% to $33.7m. This means that the company has finished its financial year with a far healthier balance sheet. Accordingly, it should be able to increase how much money can be returned to shareholders.

And it’s doing just that. Due to the excellent results, the dividend has been raised by 28.5% to a record 0.916p per share. This equates to a dividend yield of 5.4% at the penny stock’s current share price. It is also comfortably covered by profits, which will allow the group to continue to invest in itself and reduce debt further.

In addition to the record dividend, the board has also approved a share buy-back programme, of which details will be announced soon. Over the past few years, PAF has not bought back its own shares, so the fact that it’s starting to do so now shows real optimism. It should hopefully have a positive effect on the PAF share price.

Other factors

One reason why PAF was so successful in the past year was due to the high price of gold. In fact, last year, the average price of gold received was $1,826 an ounce, compared to $1,574 the year before. This demonstrates the company’s reliance of the price of gold though, a factor which may hinder it in the future. Indeed, the price of gold has already fallen below $1,800, and many fear there is further to fall. This is the main risk with this penny stock.

Even so, other than the potential for the price of gold decreasing, there are currently no other signs that this was a one-off year. For the year ending June 2022, PAF remains committed to producing a minimum of 195,000 ounces of gold, and I believe that it will be able to exceed this. And it also hopes to increase shareholder returns further, a sign that the best is yet to come.

What’s next for this penny stock?

For now, I feel that short-term volatility will continue. But for the long term, I’m confident and this is the reason why I originally bought PAF. I also believe that the stock has been oversold in recent weeks. As such, it currently trades on a very low price-to-earnings ratio of 6. This illustrates that the share price is too low, and I’d have no hesitation in buying more shares.