This fully listed distribution business has limited growth potential but generates high cash. The company could earn net cash as early as 2025. The expected yield is 7.8%, and the expected dividend coverage ratio is approximately 2.4 times.
While it’s unlikely that the dividend will increase significantly over the next few years, the cash generation means it can maintain the dividend without financial concerns. Pre-tax profits are likely to remain flat or decline slightly over the next three years. That seems too low, which is why the expected multiple is never much higher than 5.
Swindon-based newspaper and magazine distributor Smith News (LON: SNWS) has been winning and renewing major contracts in recent weeks. This provides visibility into two-thirds of expected revenue even before additional updates.
The main new acquisition is a £27m-a-year deal with News UK, which covers the London area. This will contribute for nine months this year.
Magazine income is decreasing, which means less business income. There are ways to generate additional income. One of our initiatives is to collect recycled waste from our customers, thereby using our vehicles more efficiently. We already have 4,000 paying customers. The move could boost profits by £1m this year, offsetting a decline in its core business.
There is extra space available for rent and potential for direct-to-consumer business. There is also the possibility of adding new product areas.
Smith News could still move to a net cash position in 2025 as long-term debt is reduced. Lower interest rates will help offset the decline in operating profits due to inflationary pressures. There are also plans to further reduce costs.
In the year to August 2024, pre-tax profits are expected to be flat at £33.4m, with sales falling from £1.09bn to £1.03bn. Dividends totaled 4.15p per share over the past two years and are expected to continue, although we may expect a slight increase once the £10m limit on lender payments ends.
At 53.8p, the share price is up 15% this year. The stock fell through the first nine months of this year, but rose by about a third in the most recent quarter. Still, there is potential for revenue and stock price growth. buy.
