Not many UK shares offer a dividend yield of over 8%. But some do!
One of them is Me Group International (LSE: MEGP). It used to be known as Photo-Me and you are probably familiar with the firm’s photo booths, which people use for things like passport snaps.
The business is bigger than that, though (which explains why it changed its name a few years ago). It has a large international footprint and also operates all sorts of other vending machines, such as the Revolution washing machines you may see at petrol stations.
That sounds like a great business model – lower staff costs due to self-service and in many cases a captive customer audience.
Yet the share price has fallen 30% in a year. It now yields an eye-watering 8.2%. What is going on?
An unloved business in the City
There has long been a certain amount of cynicism about Me Group among sections of the investing community. Surely photobooths are a thing of the past, they reason – and how often do you actually see people using them nowadays?
Not only that, but an abortive attempt to sell itself last year made investors question what the company is actually worth. A historical mis-statement of some cash balances further alarmed some investors.
Me Group, in other words, has lost a fair bit of investor confidence over the years – and it shows in the share price.
I see long-term potential here
The thing is, I reckon this UK share still could do well over the long term. While the photobooth business had a difficult first half, it started the second half showing year-on-year growth.
Aldi installed 25 new photo booths in its store estate and Me Group continues to see photo booths as core to its business. With the right innovation, I believe the photo booth business could be around for decades yet.
Meanwhile, the laundry machine business is doing very well. In the first half, laundry vending revenue grew 12% year-on-year on the Continent and 25% in the UK & Republic of Ireland. Those are strong numbers. I reckon there could be more to come, as there is a lot of white space left in the laundry market.
This remains a highly cash generative business, helping underpin the dividend. Cash generated from operations in the first half was lower than in last year’s first half, but still came in at £39m. I see the fall as a temporary blip, as the company has been spending both to expand its number of machines and also increase inventory.
Very attractive dividend
Clearly, as its price suggests, this UK share still faces risks. The ongoing cost of expanding its estate of laundry machines will likely eat into cash flows. Geopolitical risks in the Middle East also threaten some of its revenues.
Given the dramatic share price fall and ongoing weak investor sentiment, I fear the share could fall further, especially if the company disappoints in any way.
Still, taking the long-term view, I see it as undervalued. The 8.2% yield means I think this income share merits investors’ consideration.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
