Why smaller firms could be a lifeline for profit seekers

Even now solid stocks can still be found

WHILE Britain’s biggest companies have wrestled with dividend payments, smaller firms have found the battle even harder. Hundreds have suspended, postponed or cut dividends and more are likely to follow.

However, some jewels remain – firms t hat have rewarded shareholders and, crucially, look set to continue doing so.

Among the FTSE 250 index, companies such as Direct Line and Sabre Insurance are both offering chunky yields, backed up by earnings.

As a member of the FTSE 100, Direct Line was a perennial member of the Midas Dogs of the Footsie portfolio. But the Churchill t o Privilege i nsurer was demoted from the elite index last September and earlier this year cancelled its 2019 final dividend.

Just last week, however, chief executive Penny James reinstated dividends for this year and delivered a special payment to compensate shareholders for the 2019 cancellation.

Covid-19 drove up costs in some areas but claims were sharply down as fewer motorists took to the road so the company had a much better first half t han expected. Direct Line shares rose in response to James’s generosity on the dividend front but, at £3.34, the stock is still yielding more than 8 per cent and the business seems to be in rude health.

Sabre also specialises in motor insurance, including Go Girl, for young female drivers. Primarily though, it focuses on insuring topend cars and drivers who may find it hard to obtain cover elsewhere. Midas recommended Sabre in 2018, when the stock was £2.61 and the shares were yielding 5.6 per cent. The shares had risen to £3.08 before the pandemic erupted but they have since fallen back to £2.65 again.

Operationally however, Sabre is doing well and boss Geoff Carter, an insurance veteran, believes the company’s prospects are sound. A dividend of 19p is forecast for 2020, putting the stock on a yield of over 7 per cent. Looking beyond insurers, Pay

Point appears more resilient than many. The group was a favourite stock of Neil Woodford’s, one of the few shares in his Equity Income fund that provided an income. PayPoint provides kit that allows customers to make cashless payments in convenience stores and collect parcels from online retailers, such as Amazon. Consumers can also pay utility bills with PayPoint technology and top up mobile phones. As shoppers shy away from cash and turn increasingly to cards to purchase even small items such as pints of milk or packets of digestives, PayPoint is benefiting. The utility bill arm has done less well but in the long-term, PayPoint should deliver the goods.

Right now, PayPoint is suffering from lingering – and probably ill-founded – fears about its prospects. The stock has fallen from £10.90 in January to £6.36 at the end of last week. With a dividend of 31p forecast for the year to March 2021, that puts the shares on a yield of just over 5 per cent and brokers at Liberum expect the stock to rebound to £10 in the coming months on a yield approaching 5 per cent.

Over on the junior AIM stock market for even smaller firms,

Highland Gold deserves a closer look. The company owns four operating gold mines in Russia so it has benefited from the soaring gold price and will continue to do so. But Highland has also put in place a number of self-help measures, designed to increase efficiency and expand production.

Highland is run by Eugene Shvidler, a Russian- American billionaire and close friend of Roman Abramovich. Shvidler owns s hares in A bra mo vich’ s steel-making firm Evraz and Abramovich owns just over 4 per cent of Highland, which sounds cosy but does suggest they want both to succeed. To date, they have done considerably better with the gold miner than its larger steel-making peer.

Last month, Shvidler said Highland expected to produce up to 300,000 ounces of gold this year and confirmed that production and sales had been largely unaffected by the pandemic.

The news, combined with a rising gold price, sent Highland shares up from £2.17 to £2.95 and analysts expect that the stock will continue to gain ground.

Midas recommended Highland in September 2018, when the shares were £1.63 and yielding just over 6 per cent. Today, the shares are 80 per cent ahead, Highland is yielding 4.7 per cent and it seems as if rewarding shareholders remains a priority.

Searching for sustainable income among smaller companies can be challenging at the best of times but is even trickier during periods of economic turmoil. Companies that seem to offer inordinately high yields are best avoided. If a stock looks too good to be true, it probably is. But solid businesses whose dividends are backed up by earnings, can still be found, even now.