Printing.com is small business survivor

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
 
"High yield" is a theme you are likely to hear plenty more with regard to stock selection in 2009. It is not simply that investors have tempered hopes for capital growth; it is because sustained dividend payouts are proof of a firm's cash generation, strength of markets and financial controls. Dividends can usefully reflect the overall risk/reward profile on a share, especially in hard times.
 
When a yield is in the order of 5% to 10%, coinciding with a stockmarket low (like we saw in December), it may be one signal the shares are oversold. But when it is 10% or higher, you need to consider whether it is a warning sign, the payout being unsustainable.
 
Although large company shares are justifiably seen as having more dependability, the above principles apply across the stockmarket. AIM-listed Printing.com (PDC) is a useful example, currently offering one of the highest yields - 11% - among smaller companies, if a payout of about 3p per share is maintained. Given a strong balance sheet, this ought to be possible in the short-term, however, the situation shows how boards are likely to keep dividends under review according to economic circumstances and how best to deliver shareholder value.
 
Printing.com is a franchise-oriented group with a central production hub, printing business stationery for small to medium-sized firms. You can learn more by visiting printing.com. Its customers can reasonably be described as sensitive to changes in the economy. hence in pricing the shares at a low point of 27p the stockmarket is exacting a high yield to compensate for the risks. At this level, the group is capitalised at £12 million, a modest discount to annual sales, and such a price/sales ratio below 1 is often a sign a company is undervalued.
 
Despite its cyclical profile, Printing.com is engaged in essential products for business and is a well-run operation with various competitive advantages: good credentials as a recovery share. A tight market means falls can be accentuated and the shares remain out of favour, but when sentiment turns to spotting small cap value, then Printing.com should be worth owning. Now is the time to assess and follow it.
 
After the latest trading statement (22 January), the chief executive bought 3,000 shares at 25p, taking his stake near 9.2 million - or 20.4%. While this may look rather like a propping-up attempt, there are not many shares available even if he did seek more.
 
Although the nub point of the update was a mild profit warning, with the outcome for the financial year to end-March set to be slightly below market expectations, this looks a short- to medium-term issue. After a 3% like-for-like decline in trading during November and December, the daily run rate has been maintained during January. This may be being helped by promotional spending: starting with a January sale, Printing.com is investing £215,000 to boost its franchisees' promotions to the end of its financial year in March. This is getting results: a 10% like-for-like increase in new clients - 2,400 - during the first two weeks of January.
 
Over half of UK/Ireland sales are generated by such franchisees. Bad debts have increased, which is hardly surprising given the nature of the customer base. (At end-September, overall trade debtors were £3.5 million.) Management says that, despite the prospect of short-term problems with some franchisees, there is a strong pipeline of new ones such that it is confident the estate will continue to show expansion during the second-half of the fiscal year.

Wary of the recession

Most likely, investment timing in the shares depends less on these company-specific factors than the "top-down" issue of how deep and prolonged this recession proves. Below 30p, Printing.com offers good long-term value, although it is hard to say for how long sentiment will remain adverse.
 
Two analysts follow Printing.com: one is sponsored and the other (Brewin Dolphin) serves the company's broker which also owns 13.7% (likely for clients) of Printing.com. Not to be cynical, for sound communications with management it is more likely to mean forecasts in line with budget: both analysts have trimmed their 2008/09 year pre-tax profit forecast from £2.3 million near £2 million. This implies earnings per share of about 3.2p down from 3.5p.
 
This means a single figure price-earnings ratio, down from the mid-teens enjoyed in previous years when Printing.com enjoyed a growth profile, but it obviously leaves the dividend payout very full in relation to earnings. The dividend looks just about secure on grounds of the balance sheet, however. Brewin Dolphin estimates £3 million cash and £1 million net cash (after deducting finance leases) at end-March, which looks fair enough on the basis of the end-September numbers published last November. The cash-flow statement for the previous financial year, when a 3p per share total dividend was paid, shows this cost £1.3 million.
 
Yet directors and investors need to judge what would be a prudent payout also in relation to a firm's investment requirements and opportunities arising. Besides the likely ongoing need for promotional spending, there ought to be scope for group development by acquisition - and at attractive prices. Smaller integrated printers are likely to come under pressure to rationalise their costs by joining a wider network and they can also offer an acquirer new marketing channels. So it would be wise for a listed group to ensure it has a war chest of cash for the medium term, rather than pay it out in high dividends, to enhance long-term value.
 
Although Printing.com has a proper board with two non-executive directors, it is fair to point out the non-executive chairman owns 3.6% of the group besides the chief executive's 20.6%. Since the higher rate of income tax is 40% versus capital gains tax of 18%, it is manifestly in the two key directors' interests to prioritise capital growth - assuming their aim is to maximise long-term wealth at the expense of income.
 
This is not to imply, as a main point of this piece, that Printing.com's dividend yield is at risk, just that you need to look beneath the surface of any high-yield share and consider the choices likely to face directors. With analysts projecting broadly flat earnings for the 2009/10 financial year, it does however seem wise to be cautious about Printing.com's payout, especially if recession worsens.
 
Printing.com is partnering in the US market with a well-established commercial printer based in Florida, where two stores are scheduled to open this April. This may only break-even in the medium term, though, and seasoned followers of smaller companies may see US expansion as a risk factor especially in these tough times.