ASX Code: NCK
Security price: $3.02
Forecast distribution: 13c per share fully franked
MANY investors have been focused on big-cap stocks in their hunt for yield. But with the likes of Telstra and Commonwealth Bank surging, investors should not rule out solid smaller-cap stocks with good fundamentals and attractive valuations.
Nick Scali is a small-cap retailer with a track record of strong financial and management performance even in difficult climates. Along with growth potential, its solid and rising dividend yields make it an attractive option for income investors.
Nick Scali sources furniture from overseas manufacturers including dining tables, lounges, chairs and coffee tables. The stores are aimed at affluent 35- to 55-year-olds. Its other brand, Sofas2Go, is pitched at first-home buyers and renters.
Importantly, none of the showroom inventory is for sale. Buyers pay cash upfront and the furniture is delivered from a distribution centre. That cuts inventory levels and ensures strong cashflow.
The retail environment is tough with consumer confidence at lows. But Nick Scali has continued to perform well.
Its net profit after tax in the first half to December 31, 2014, rose 28 per cent to $10 million. Despite increasing sales 8.3 per cent, the company managed to maintain its gross margins.
That solid performance continued into the start of the second half. Sales in January — traditionally Nick Scali’s strongest month — grew 7 per cent.
The company has also been expanding. There will be seven new stores by June, taking the total to 41. I think there is potential to double the number of stores to about 80 over the next 10-15 years, and increase Sofas2Go stores from five to more than 100 in that period.
The company has a strong balance sheet with net cash of $22m, and it is forecast to pay a dividend of 13c per share for the full year, giving a solid dividend yield of 4.3 per cent.
But the payout is forecast to rise to 16c per share in 2016, giving a healthy yield of 5.3 per cent, and to 18c in 2017, a yield of almost 6 per cent.
At $3.02, Nick Scali is trading below my valuation of $3.42 and forecast valuation (based on forecast results) of $3.49. Its dividend is solid and rising; when combined with its record and growth potential, it is a good option for income investors.