4 small cap companies you need to consider

These four companies have both potential growth and decent dividends

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 10, 2012 3:42 pm AEST

Most of the focus these days seems to be on dividend yield and the large cap or so-called "blue-chip" stocks that pay a dividend that is often higher than the return you can get in a bank account. Telstra and the banks are the first ports of call for many investors, tempted by the juicy dividend yield. The problem with these companies, is that they are unlikely to experience the capital growth of smaller companies. Hence the reason many of Australia's small cap fund managers have been outperforming their large cap competitors as well as the market.

Here are four small caps with the potential for substantial capital gains and the bonus – a decent fully franked dividend yield from three of them.

Advertising

Media and advertising company STW Communications Group (ASX: SGN) reported its first half earnings yesterday. Revenues rose 4.7% over the same period last year, net profit for the half year came in at $18m which equates to earnings of 5 cents per share and the company declared a 3.3 cent fully franked dividend. On those numbers the stock is currently trading on an undemanding P/E ratio of 8.8 and paying a dividend yield of 7.9%.

The issue to watch with this company is the debt levels, which currently stand at $136.9m, against $29.3m in cash. You only have to see what happened to STW Group's competitor Enero Group (formerly Photon Group) to see what can happen when companies take on too much debt. The share price fell from over $5 in 2007 to less than 10 cents in 2011.

Metal detectors

Codan Limited (ASX: CDA) produces metal detectors and high frequency radio products . It has also recently expanded into mining communications solutions.

The company reported its 2012 financial year results yesterday, with revenues rising 6% to $179.4m. Net profit came in at $23.1m, which equates to earnings per share of 14 cents, and the company declared dividends for the year of 9.5 cents, fully franked. Codan reported that its core metal detection business remains strong, the sales pipeline for radio communications continues to strengthen and the mining technology business is well placed for significant growth. The company expects another good result in the 2013 financial year.

Codan is currently trading on a P/E of 10.9, and div yield of 6.3%.

Home building

Tamawood Limited's (ASX: TWD) shares have rocketed up in trade so far today, climbing 7.8% to $2.08 at 3pm, thanks to a 22.6% increase in net profit for the 2012 financial year to $8.3m. The home design and construction company reported a 14.8% jump in sales to $131.4m over the previous year, despite housing demand falling to levels not seen for many years. Total dividends for the year were 21 cents, fully franked, putting the company on a dividend yield of more than 10%, despite today's rise.

Based on earnings per share of 21.7 cents, the company is trading on a P/E ratio of 10.4. The company declined to give any guidance for the 2013 year, but suggested earnings per share could be maintained, even if the current tough market continues.

Online travel

Online travel company Webjet Limited (ASX: WEB) has reported a 24% increase in profits, to $13.6m compared to the previous year. Earnings per share jumped 31%, thanks to a share buyback and the company increased the dividend by 18% to 13 cents per share.

Webjet has now reported 17 consecutive halves of growth, with bookings via its mobile app generating 502% growth. In 2011, the company expanded its hotel business, and has aggressively expanded into the US, South Africa and Asia. At the same time, Webjet partnered with Coles to allow customers to use flybuy points to pay for part of their purchase on Webjet's website. The continued focus on its core business while expanding overseas and into hotel offerings has paid off for the company so far. And all this has been done without having to load up on debt. The company currently has $34m in cash on its balance sheet.

Competitors Wotif.com Holdings Limited (ASX: WTF) and Flight Centre Limited (ASX: FLT) might be squirming in their seats. Despite trading on a current P/E ratio of 23.9, Webjet appears to be more than living up its high expectations.

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Motley Fool writer/analyst Mike King owns shares in Flight Centre. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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