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8% dividend yield, strong HY20 result from this small cap

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NAOS Small Cap Opportunities Company Ltd (ASX: NSC) has reported its half-year result to 31 December 2019.

What is NAOS Small Cap Opportunities?

It’s a listed investment company (LIC) run by Naos Asset Management that invests in ASX small caps with market capitalisations between $100 million to $1 billion, generally not in the ASX100. It maintains a high-conviction portfolio of around 10 names.

What did NAOS Small Cap Opportunities report?

The LIC reported that its net profit after tax grew by 222% to $18 million after a strong performance by its investment portfolio during the period.

The results of LICs can seem confusing because they deliver investment returns, a return of -5% can seem bad in an absolute dollar sense compared to last year’s result, whilst generating a return of 10% in one year and 20% in another year shows profit doubling in dollar terms. LIC profits aren’t consistent like normal operating businesses.

For the half year the NAOS Small Cap Opportunities investment portfolio produced a positive return of 19.16% compared to the benchmark S&P/ASX Small Ordinaries Accumulation Index returned a 3.89% over the same six months. This was a strong period of outperformance. 

The total shareholder return, which measures the change in share price and dividends paid, was 36.49% which reflects the strength of the investment portfolio as well as a narrowing of the share price discount to the net tangible assets (NTA) over the half-year. The impressive return doesn’t include the benefit of franking credits.

The LIC also continued with its share buyback. Just over 5.6 million shares were bought back for a cost of $3.8 million, which was at a discount to the NTA and was accretive to NTA.

NAOS Small Cap Opportunities dividend

The Board decided to declare a fully franked dividend of 1 cent per share for the second quarter of FY20, bringing the FY20 total to date to 2 cents, the same as the average quarterly payment last year.

At the end of 31 December 2019, its profit reserve was 16.5 cents per share, Naos is still aiming to provide a sustainable stream of growing dividends over the long-term.

Is the LIC a buy today?

It currently offers a grossed-up dividend yield of almost 8%, which is very attractive in this era of low interest rates.

It’s trading at a discount to the NTA at 31 December 2019 of 18.4%, which is a large discount compared to most other LICs. I’d be happy to buy a position today.  

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Motley Fool contributor Tristan Harrison owns shares of NAO SMLCAP FPO. The Motley Fool Australia has no position in any of the stocks mentioned. 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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