A Rising 6.3% Yield With A P/E Of 4

Published in Company Comment on 14 June 2012

Dividend up, share price down: this FTSE Small Cap is worth a closer look.

When I ran a share screen in March, FTSE Small Cap company Creston (LSE: CRE) popped up. Since then, the share price has eased back a little, but the recent full-year results have prompted a closer look.

This practically debt-free, high-yielding business in the media has just posted a 17% dividend hike on the back of an 11% increase in revenue and a stable underlying profitability performance. It's now yielding around 6.3% on this year's payment.

Low debt, well-covered dividend

The share screen looks for companies with a decent, well-covered dividend and low debt. If it finds those things cheaply enough, there's a good chance that other desirable characteristics might be present, too.

Right now, at the share price near 55p (market cap. £34m), Creston is trading on a forward earnings multiple of just over four for 2013 based on underlying earnings per share, so it certainly hits the spot for cheapness.

Steady performance

The company provides marketing and communications services to blue chip and other clients in three divisions it calls Communications, Health and Insight. Business has been steady, as the figures show:

Year to 31 March:201020112012
Revenue (£m)616875
Net Cash from operations (£m)15.447.297.54
Continuing diluted earnings per share4.97p9.41p15.08p
Dividend1p3p3.5p
Cash (£m)2.781.681.82
Borrowings27.71.721.91

There's been revenue growth and debt reduction, all reflected in the company's progressive dividend policy.

Creston has a number of operating businesses and has a busy history of acquisitions and divestments. I think a flexible strategy can be a good idea, but it leads to one-off charges and gains on the accounts. Recognising that, the company also presents underlying profit figures, which show a broadly flat profit performance in 2012, rather than the increase in earnings per share shown from the income statement.

It's also worth noting that 2010's net cash performance was flattered up 23% from operations that didn't continue into 2011.

Outlook

Although cautious of general economic conditions, the directors believe they have a viable strategy for profitable growth and cite strong cash flow and conservative financing as reasons for confidence.

Indeed, free cash flow covers the dividend payment around two-and-a-half times, and the modest debt is more-or-less offset by cash in the bank.

Share price weakness could be down to investors worrying about the cyclical nature of the company's operations. That's understandable, after all, the shares bottomed at about 20p in 2008. Then again, they were at 120p just last year.

Given the outlook, I think Creston is a cautious buy at the current level.

Don't forget, you can find more sector ideas in this free Fool report "Top Sectors For 2012".

Further investment opportunities:

> Kevin doesn't own any Creston shares.

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Comments

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theRealGrinch 14 Jun 2012 , 9:12pm

not a company I would buy. avoid.

SteveMarkus 15 Jun 2012 , 7:38am

Might help if you said why! Not that I'm saying I would buy it - I don't like media companies myself.

Guy5pd 17 Jun 2012 , 12:24pm

Steve,

I can't read Grinch's mind but it may because they're looking at the 5-year performance, rather than just the 3-years shown in the article: in 2008 the dividend was 2.77p, cut to 0.73p in 2009, and diluted eps dropped from 12.02p in 2009 to 4.97p in 2010. The last 3 years look like it's making a strong recovery but they obviously had some difficulty (who hasn't?) in the last few years and it's worth investigating whether the problems at the heart of that have been addressed.

The other thing I note is that assets are largely intangible - in 2012's figures, 96% of their non-current assets were intangible, with just a few percent attributable to PP&E.

I'm not necessarily arguing for or against this - I think Kevin's flagged an interesting possibility - but, as ever, do your own research before investing!

Guy

PS. All figures from Digital Look, via Hargreaves Lansdown's website

boonoh 18 Jun 2012 , 2:04pm

How does Creston compare to its peers? That is probably a good analysis to do - for example against WPP (although I suspect that would be like apples to oranges, given the huge difference in scale between the two).

Interestingly, Creston could be due for a re-rating if they position themselves more as a "Digital" company to investors. Digital operations make up already 40% of their revenue, so likely to increase to maybe 50% this FY. If they do position themselves as a play on "Digital" marketing and comms, could see themselves re-rated as a growth "tech" share, rather than in the cyclical "services" industry.

clairel69 19 Jun 2012 , 4:11pm

As Guy notes, almost ALL the fixed assets are intangibles, and they have negative current assets. IE cash + debtors are less than creditors. And they can't exactly sell their goodwill to make up an emergency shortfall

Dividend cover is 0.7

Major customers - UK supermarket industry, BBC, Aviva - all companies that will be looking to axe costs or squeeze suppliers.

Doesn't exactly scream buy to me, but I've only had a quick scan... does look an interesting company though, just not an instant "buy". Not when you can get 7% at VOD or 5% at Shell.

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