Two 4% small-cap dividend stocks that could beat the FTSE 100

Small-cap Norcros (LSE: NXR) might fly under the radar of most investors, but this cheap income stock should not be ignored.

The bathroom products and tiles business has been expanding steadily over the past five years, although the market seems to have ignored this growth. 

Since 2012, operating profit has grown at a compound annual rate of 9%. However, today shares in the company trade at a depressed forward P/E of only 6.3, a valuation which, in my opinion, fails to reflect the group's outlook.

Double-digit growth

A mid-single-digit valuation implies that Norcros is struggling to grow, but that is not the case. According to a trading update issued by the firm today, for the year ending 31 March, following the significant acquisition of Merlyn -- the UK and Ireland's No. 1 supplier of shower enclosures and trays -- last year, revenue increased to 10.7% year-on-year. 

On a like-for-like basis, excluding this acquisition, revenues increased 4.4% as tough trading in the UK was more than offset by growth in the South African business, which reported constant currency revenue growth of 6%.

Unfortunately, Norcros is not immune from the headwinds affecting the broader retail sector here in the UK. The group's Johnson Tiles business suffered significantly during the second half of the year, prompting management to begin a restructuring programme. As trading continues to deteriorate, management has now unveiled a new round of cuts with the goal of saving £2m per annum at a cost of £2.1m and the loss of 50 jobs. 

Poor trading at Johnson Tiles dragged down UK like-for-like sales to a dip of 0.8% during the second half of the financial year. Excluding this business, second half like-for-like revenue grew 8.4% in the UK, following growth of 11.4% in H1. So it looks to me as if, barring this one division, Norcros is powering ahead.

With this being the case, and considering the low valuation, as well as its 4.5% dividend yield (covered nearly four times by earnings per share) I believe the stock has what it takes to outperform the FTSE 100, as the market wakes up to the opportunity on offer.

And I believe that the same is true for marketing business Communisis(LSE: CMS)

Sector discount 

Like Norcros, shares in Communisis look cheap. The stock is currently trading at a forward P/E of 9.4 and supports a dividend yield of 4.3%, even though earnings per share have grown by 17% annualised over the past six years.

It looks as if this growth is set to continue. As my Foolish colleague Jack Tang recently pointed out, Communisis has just embarked on a three-year Value Enhancement Programme to deliver 5%-10% annualised adjusted earnings growth through to 2020, via its three critical strategic themes: Digital First, Global Reach and Empowered Organisation. 

If the company can hit this goal, then in my opinion, the shares deserve a much higher valuation. How much higher? Well, the broader media services sector is currently trading at a median forward P/E of 12 while the professional and commercial services sector is trading at a median valuation of 14.2. I think Communisis deserves a valuation between the two, around 13 times forward earnings, implying a share price of 95p based on City projections that the firm will earn 7.3p per share for 2019.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Norcros. 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.

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