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3 reasons to be bullish on Dicker Data shares

The share price of IT distribution business Dicker Data Ltd (ASX: DDR) has increased 7.7% to $3.07 following the release of a trading update last week where the company reported that it had exceeded its own revenue and profit guidance for FY18.

With many of the traditional high-yielding blue-chip stocks on the Australian market such as AMP Limited (ASX: AMP)Westpac Banking Corporation (ASX: WBC) and Telstra Corporation Ltd (ASX: TLS) facing a number of issues, Dicker Data can provide an alternative option for income-oriented investors comfortable with investing in the small cap space.

Following last week’s announcement from Dicker Data, there are a number of reasons for investors to be bullish on the company’s prospects.

Earnings growth

Dicker Data announced last week that total revenue for FY18 has increased by 14.4% over the prior corresponding period to $1,494 million. Furthermore, profit before tax also rose by 15.0% to $46 million. The growth in revenue was attributed to the realisation of the full value from new vendors signed during 2017, new vendors signed in 2018 and a strong performance with existing vendors.

In March 2018, management had guided for FY18 revenue to grow 6% to $1,389 million and net profit before tax to increase 6% to $42.5 million. Thus, the figures from last week’s announcement represent a beat of expectations by 7.6% and 8.2% respectively.

Dividend yield 

Dicker Data pays out the majority of its earnings as dividends to shareholders with a dividend payout ratio of 97.5% in FY17. The stock is currently trading at a dividend yield of around 5.9%, which is higher than the broader market’s dividend yield of 4.4%.

However, with the company’s earnings continuing to grow, an increase in future dividends is likely based on its track record over the last couple of years where the dividend rose following an increase in earnings.

Inside ownership and buying

The company’s management and board are aligned with shareholders’ interests as co-founders, David Dicker (CEO and Chairman) and Fiona Brown (Non-Executive Director) own around 72% of the company’s shares.

Other directors and key management personnel such as the COO and CFO have also been increasing their stakes in Dicker Data over the last several months.

Foolish takeaway

While there are a number of reasons to be bullish on Dicker Data there are also a number of risks investors need to be aware of that could affect the business.

These would include an increase in competition, an economic downturn, rising interest rates and the loss of key vendors (the top 5 vendors represent 61% of the company’s business). Therefore, in my view Dicker Data should only represent a small holding in a diversified portfolio.

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Motley Fool contributor Tim Katavic owns shares of Dicker Data Limited. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited and Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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