2 Small Caps paying next years dividends this year!

A couple of smaller Companies have delivered better than expected dividends today by paying dividends that were in line with what analysts had forecasted for 2017. First up was Norcros (NXR) the £100m market cap. shower, tiles and bathroom fittings company which has proved to be a very frustrating value investment in the last couple of years.

I say frustrating because it has often looked cheap, generally delivered good results, but the price has traded sideways to down (see chart). This may be due to its chequered history, its South African exposure or possibly it rather large (in relation to the their market cap.) pension deficit of £55.7m compared to a deficit of £44.3m last year. The Group made deficit recovery contributions of £2.1m (2015: £2.1m) into its UK defined benefit pension scheme during the year as part of the 2012 deficit recovery plan. The March 2015 triennial actuarial valuation process for the Group's UK defined benefit pension scheme has now been completed and shows a deficit of £73.5m (2012: £61.9m) representing an 84% funding level (2012: 85%). The increased deficit is driven predominantly by historically low gilt yields.  A revised deficit recovery plan has been agreed with the Scheme Trustee, with a cash contribution of £2.5m per annum starting in April 2016, and increasing with CPI, replacing the existing agreement to pay £2.1m plus CPI per annum.  This is payable over the next ten years and thereby provides a greater degree of certainty around future deficit recovery contributions. The Group's contributions to its defined contribution pension schemes were £2.7m (2015: £2.6m).

Thus if you are holding this one or looking at it then this is something you need to be aware of given recent news flow on this issue in relation to BHS and Tata Steel that I wrote about recently. However for the time being the company has a recovery plan in place, is still paying dividends and as I said at the start just increased it more than expected on the back of the success of their recent acquisitions. So the management seem confident of further progress and the pension deficit does not seem to be a major problem at the moment, although it is costing them nearly £3m a year which is included in their numbers in any event.

On current forecasts for this year at a price of 180p (+4% today) it trades on around 7x with a 3.6% historic yield which I estimate could rise to 4% if upgrades to the dividend forecast come through on the back of today's forecast busting pay out. So I would say it continues to look good value and Scores 90 on the Compound Income Scores and as such is attractive. I guess time will tell if these results can spark a re-rating or if it continues to frustrate by going sideways.

The second even more esoteric smaller company which paid out next years forecast dividend this year was Park Group (PKG) the £134m Market Cap. multi-retailer voucher and prepaid gift card business which also does Christmas Hampers & Love2Shop vouchers etc.

Interestingly the business has seen a change in the business mix over the years and the hamper business now only represents less than 2% of their revenues as they have modernized the business in recent years. Thus if that was your perception of what the business is it might be worth revisiting as it may offer some value trading on around 12 to 13x with a historic yield of 3.75% after this years near 15% increase. For example they say:

 "The majority of our business is in the UK where economic stability and consumer confidence have improved over recent years.  This environment, together with our successful management strategy and commitment to our customers, has generated a steady rise in billings, which have increased close to 30 per cent since 2011, while profit before tax and other operating income has advanced almost 70 per cent. This performance reflects the benefits of our investment in IT infrastructure, digital platforms and new product development."

They say their balance sheet is positive and the cash position remains strong with sufficient funds available to comfortably finance working capital and further investment. Total cash balances at the year end, including monies held in trust, reached £104m (2015 - £89m), although this nets down to only £28.8m if you exclude the money held in trust for pre-payments products. There is little in the way of net assets here and they have negative retained earnings so quite a weird balance sheet with lots of cash and offsetting liabilities to go with it, so they may put you off. Otherwise there is no pension deficit here to speak of and it only cost them about £0.7m per annum so what they have is manageable.

So as I say a slightly esoteric one which is probably quite hard to get your head around, but it may offer some value alongside a reasonable and growing yield on the back of a changed and modernised business supplying alternative payment methods to poorer consumers and incentive schemes for corporates.

Thus we have two small caps delivering bumper dividends despite all the talk of dividends being under pressure this year. Worth remembering though that both these are quite dependant on consumer spending, so maybe this is as good as it gets for them if we do see a BREXIT and get the threatened recession, housing market collapse, rising rates, falling wages, rising inflation etc. etc. promised by the remain campaign. As ever I guess time will tell on that.