While the many investors who have piled into AIM stocks since are likely hoping to be capturing the upside of the next darling of the stock market – as was once the case with the likes of ASOS – they are probably not expecting dividends to pay them while they wait.However, a cultural shift is going on in small and micro-caps, according to Miton’s Gervais Williams, that will see them outperform the larger dividend-paying end of the market.
“Dividend paying at the small end of the market is going to grow faster, which will drag up share prices. Even if the whole market doesn’t grow it will still mean capital growth at the smaller end eventually.”
Here, the manager of the £355m CF Miton UK Multi Cap Income fund reveals five stocks listed on the AIM market that he backs for income and growth.
Amino
This company manufactures internet protocol television (IPTV) equipment, among other digital entertainment hardware, allowing access to television over the internet.
Williams said: “It has a nice stable business but what is exciting is that it is growing its IPTV business. It is on a P/E of 15.9, which doesn’t sound very exciting. But about a third is in net cash so if you net the cash off it is on about 10 times earnings. It also has a yield of about 3.5 per cent.”
Over the past three years the stock has gained 240.2 per cent with a particularly sharp recent uptick last month.
Performance of stock over 3yrs
Source: FE Analytics
“The share price was about 95p [in October] and then the market became unsettled and someone tried to sell when we tried to buy at 80p,” Williams said.
It has since soared and is currently at 115p.
The manager added: “The company directors came out with an announcement that the company was trading above expectations and it has moved up by almost 50 per cent but it is still pretty cheap in our view.”
“We have had for about two years now but we have been adding to it.”
Mucklow
Williams says this company is involved in property around Birmingham, mostly industrial property.
“It has been around since 1962 and has been growing its dividends for a long time. For the last 15 years it has really struggled with people moving overseas and they haven’t seen much of an increase over this time.”
“However, more recently with Landrover doing well and most particularly with people not going to China and bringing more manufacturing back to the UK, [Birmingham is] seeing the first upturn in the last 15 years. This is rather reassuring.”
“What I hadn't realised is that the cost of industrial real estate in the UK is a fraction of what it is in China. The staff are probably more expensive but the capital costs are much less.”
The stock has gained 78.31 per cent over the past three years.
Performance of stock over 3yrs
Source: FE Analytics
The company said in a recent statement that its tenants were starting to accept demands for rental growth although it is still at a level too low to develop new space.
Fairpoint
Williams says this financial services firm has the highest yield of the five stocks picked here.
“This is a company involved with helping people with debt problems,” he explained.
“If you have too much debt, you are in a period where perhaps you are getting divorced or have lost your job, you can restructure your debt in an informal way. If it is really bad you can go into what is called an individual voluntary agreement, which is like going bust. You pay as much as you can for five years and then you are free of all further debts.”
“This is what this company does. It is very detailed and has to be very correct in collecting large numbers of small amounts of money. It also has to very diligent to make it complies with the law.”
“It has done pretty well over the years, it yields over 5 per cent and the P/E ratio is about 10 times earnings.”
The stock has gained 178.84 per cent over the past three years.
Performance of stock over 3yrs
Source: FE Analytics
Williams says the firm has has also bought into a legal practice business recently, following governmental deregulation.
“It is using its skill to be more efficient in routine legal services to a wider range of customers at a much lower cost than standard legal practices,” he said.
K3 Business Systems
Williams says this company is involved in software design for the manufacturing and retail sectors.
“It has also just developed some new software for logistics companies, written on Microsoft’s new AX language. For whatever reason the new software is very, very popular and they can't install it fast enough. They have more demand than they have people to install it so they are capacity constrained at the moment which mean they are growing very well,” he explained.
“What has happened recently is that Microsoft has said would they mind if Microsoft used its own sales force to sell the same software in the US, so it’s very strong.”
“It doesn't have a very big yield though, only about 0.5 per cent, but it should grow very rapidly.”
The stock is up 83.81 per cent over three years, however, much of the gains has made in the past 18 months following a contrasting period of significant falls.
Performance of stock over 3yrs
Source: FE Analytics
Flowtech Fluidpower
This firm is the only one of Williams’ stock picks that is a newly issued company, having floated in May 2014.
“It supplies hydraulic pieces to repair factories. It used to be under venture capital and has come to market with all of its debt repaid from the issue and is on a P/E of 13.6.”
Since its flotation it has gained 20.85 per cent.
Performance of stock since May 2014
Source: FE Analytics
Williams says Miton is the largest shareholder in the firm.
