I’d buy 9,100 shares of this rising penny stock for £1,000 a year in passive income
Buying penny stocks means investors take on an increased chance of volatility. But the potential rewards on offer can sometimes make taking the risk worthwhile.
One small-cap share I’ve just bought is Ramsdens Holdings (LSE: RFX). This financial services group offers foreign currency exchange, pawnbroking loans, and the buying and selling of jewellery.
Here’s why I think this AIM-listed stock could be smart long-term buy.
Cost-of-living crisis
With UK inflation near a 40-year high, ‘pledge lending’ has reached record levels for pawnbrokers. That’s lending secured against a customer’s valuable items, such as watches or jewellery.
The unfortunate reality is that many people need instant cash. But banks are currently more cautious about lending than at any point since the 2007-2008 Financial Crisis. So people are resorting to pawnbrokers as an alternative to payday lenders, which are being clamped down on by regulators.
All this is starting to show up in Ramsdens’ financials, as we can see in its latest half-year report (to 31 March).
- Gross revenue increased by 33% year on year to £39m
- Pre-tax jumped 68% to £3.7m
- Jewellery retail revenue increased by 32% to £17.3m
- Online jewellery retail sales surged 89% to £3.7m
- Pawnbroking loan book grew 29% to £9.7m
- Foreign currency exchange gross profit rose 41% to £4.9m
Expanding business
During H1, the company opened six new units in Bootle, Basildon, Bradford, Croydon, Maidstone
and Warrington. This brought its total store number to 158, excluding two franchises. The average unit generates roughly £0.5m in annual revenue.
It plans to open six more in H2, adding to what’s already an impressive retail footprint.
For context, its rival H&T Group, the UK’s leading pawnbroker, has 273 stores. So Ramsdens isn’t too far behind, and management sees “attractive consolidation opportunities in what remains a highly fragmented market“.
A grand a year in passive income
The interim dividend was hiked 22% to 3.3p per share. So brokers now expect the company to pay 10.4p per share for this financial year and 11p next year.
Now, broker forecasts sometimes prove inaccurate and dividends aren’t guaranteed. But the FY2024 estimate gives the stock a forward-looking dividend yield of 5%. That means I’d need around 9,100 shares at 222p for £1k a year in passive income.
They would cost me just over £20k, which is admittedly a fair chunk of money. But the stock is cheap with a forward-looking P/E ratio of 9.3. Plus, the dividend is reassuringly covered 2.5 times by trailing 12-months earnings. So there’s a lot to like here, I feel.
The three balls
The symbol seen on all pawn shops is three balls suspended from a bar. This is attributed to Saint Nicholas, the patron saint of pawnbrokers, who is said to have given a poor man’s three daughters a bag of gold each so they could get married. Others link the symbol to the Medici family of Florence during the Renaissance.
Either way, the time-honoured pawnbroking business is a potentially lucrative one to be in, as Ramsdens is proving.
Long term, industry regulation could be a risk, while sales momentum could slow in the short term. But with Christmas approaching and consumers needing cash, or possibly second-hand jewellery for gifts, growth at the company should continue.
The post I’d buy 9,100 shares of this rising penny stock for £1,000 a year in passive income appeared first on The Motley Fool UK.
Don’t miss this top growth pick for the ‘cost of living crisis’
While the media raves about Google and Amazon, this lesser-known stock has quietly grown 880% – with a:
- Greater than 20X increase in margins
- Nearly 60% compounded revenue growth over 5 years – more than Apple, Amazon and Google!
- A 3,000% earnings explosion
Of course, past performance is no guarantee of future results. However, we think it’s stronger now than ever before. Amazingly, you may never have heard of this company.
Yet there’s a 1-in-3 chance you’ve used one of its 250 brands. Many are household names with millions of monthly website visitors, and that often help consumers compare items, shop around and save.
Now, as the ‘cost of living crisis’ bites, we believe its influence could soar. And that might bring imminent new gains to investors who’re in position today. So please, don’t leave without your FREE report, ‘One Top Growth Stock from The Motley Fool’.
Claim your FREE copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#FFFFFF’);
})()
More reading
- 1 excellent FTSE 250 stock I’d buy in August without hesitation
- Here’s the London Stock Exchange dividend forecast for 2023 and 2024!
- Searching for a second income? I’d buy these top dividend stocks without hesitation
- Second income for £10 a day? Here’s how
- 5 steps to earn £500 in monthly passive income
Ben McPoland has positions in Ramsdens Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
