Today I'm looking at two small-cap dividend growth stocks which I believe deserve more attention from investors.
In my view, both of these companies have the potential to deliver market-beating long-term gains. So they could be ideal pension investments if you're hoping to retire early.
CML Microsystems (LSE: CML) designs and manufactures semiconductors. The company operates in two markets, solid state storage and wireless communications. Shares in this £87m firm have risen by 42% over the last two years, putting CML well ahead of the wider market over the same period.
The group published its full-year results today, showing that revenue rose by 14% to £31.7m for the year to 31 March. Pre-tax profit was 9% higher at £4.6m, and the dividend rose by 5.4% to 7.8p per share.
The company has no debt and its net cash balance rose to a new record of £13.8m during the year. Management expects to use some of this cash to make further acquisitions when opportunities arise, providing a potential catalyst for growth.
What could go wrong?
In today's results, managing director Chris Gurry warned that issues with the supply of certain raw materials might affect customer purchasing patterns this year. As a result, Mr Gurry expects sales and profit growth to be weighted to the second half of the current year.
My concern is that hoped-for improvements in the second half don't always happen. There seems to be a risk that earnings could fall short of expectations this year. This only sounds like a short-term blip to me, but it might provide us with an opportunity to buy the stock cheaper at some point later this year.
CML shares trade on a forecast P/E of 20, with a prospective yield of about 1.6%. That's not cheap, but stripping out net cash (which doesn't contribute to earnings) gives a cash-adjusted forecast P/E of 17, which seems more reasonable. I'd consider this stock as a long-term buy at around 500p.
It could be the right time to buy
Another company that interests me at current levels is bowling alley operator Ten Entertainment Group (LSE: TEG). This firm floated in April 2017 and is a smaller rival to well-known bowling operator Hollywood Bowl.
Ten Entertainment's first full-year results as a public firm impressed me in March. Like-for-like sales rose by 3.6% and total sales were 5.5% higher, at £71m. The group's adjusted profits rose by 18% to £13m, suggesting that new and refurbished centres are making a strong contribution to growth.
Leisure businesses like these are increasingly occupying space that was once used by retailers. So the group's continued expansion could prove to be well timed.
A winning stock?
The IPO generated enough cash to clear most of the group's debts, leaving it with net debt of just £4.7m at the end of 2017. Free cash flow of £4.6m compares well with last year's after-tax profit of £5.2m, suggesting that this business should generate plenty of cash.
Earnings growth is also expected to remain strong. City analysts have pencilled in earnings per share growth of 17% this year and 18% in 2019. With the shares trading on a forward P/E of 14 and a prospective yield of 4.2%, I believe this growth business could be too cheap to ignore.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Hollywood Bowl. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.