Natural resources royalty companies aren't the most well known type of businesses listed on the LSE. But one, Anglo Pacific (LSE: APF), is worth getting to know thanks to a high dividend and low valuation. At today's prices the firm kicks off a 4.84% annual yield and is trading at just eight times consensus forecast 2017 earnings.
Resource royalty firms work by handing miners initial funding in return for a stream of income once they begin digging up coal, iron, or whatever else they're searching for. This is a still cyclical business, since if commodity prices fall too low miners may stop production, but it is less volatile than owning shares of miners themselves.
Aside from lower volatility, an added benefit of investing in the likes of Anglo Pacific is that the company is able to return just about all of its cash flow to investors since it doesn't have to worry about investing in equipment, labour or new mines. In 2016 the company's stakes in 11 mines across five continents brought in 9.76p per share of earnings and 7.93p per share of cash flow. This allowed management to return a full-year dividend of 6p, reduce net debt to a minuscule £1m and pursue further funding projects in other mines.
Six of the company's portfolio mines are currently in production with two in development and three at an early stage. So there is room for royalties, profits and dividends to grow in the coming years if commodity prices remain stable or rise. Of course, this is far from certain. But for now, Anglo Pacific investors are happy enough receiving a bumper dividend while waiting for commodity prices to pick up.
Driving big shareholder returns
A big dividend-paying business that's slightly more straightforward is commercial light van renter Northgate (LSE: NTG). The company, which operates both here in the UK and in Spain, currently offers a 3.17% yielding dividend while its shares trade at just 11 times forward earnings.
There's also plenty of room for this dividend to continue growing in the coming years as payouts last year were covered a full three times by earnings. And although underlying earnings per share fell from 27.1p to 25.8p year-on-year in the six months to December, the medium term outlook for the business still looks positive.
This is because the company is gearing up for a period of increased growth in its Spanish operations by investing in new vehicles that it can let out in the future. This caused capex to rise in the period, which together with a slowdown in letting in the UK led to the fall in earnings.
Still, with the UK economy continuing to hum along nicely and the Spanish economy growing at a very steady clip, the company is in a very good position. This will be especially true if it continues to win over clients that switch from owning and maintaining their own fleet to simply using Northgate's. This decreases their running costs and insulates them from the vagaries of used van prices, so Northgate has plenty to offer them.
With the company's shares trading at a very low valuation, solid growth prospects and an already impressive dividend I'll be keeping my eye on Northgate in the coming quarters.
But if you're looking for a great stock trading at an even lower valuation, look no further than the Motley Fool's Top Small-Cap. This stellar company, which has grown earnings by double-digits for four straight years, is currently trading at just eight times earnings.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of Anglo Pacific. The Motley Fool UK has recommended Northgate. 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.