Are Service Stream (ASX:SSM) shares a buy for its fully franked dividend?

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The Service Stream Limited (ASX:SSM) share price has gained 14 per cent in the last 12 months, now trading at $1.52.

Service Stream is a largely people-based business that provides sub-contracting installation
services to larger telecommunication, gas and electricity companies.

In June, the network services company said it has extended its contract with NBN Co for an additional 18 month term to 31st December 2019.

Revenue from the contract over the additional 18 month term is estimated to be in the order of $45 million, supplementing that arising from the customer activation and service assurance activities undertaken for nbn under the much larger Operations and Maintenance Master Agreement (OMMA) which Service Stream has held since December 2015.

Writing in its May letter to investors, leading small-cap fund manager Ophir Asset Management said that while they were initially drawn to the business due to the fairly material growth opportunity ahead of the company in providing installation and often misunderstood maintenance services for the national NBN rollout, the company’s capital position provides an additional attractive set of outcomes for shareholders.

Ophir says management can either choose to deploy that capital toward an accretive acquisition or take advantage of an increased dividend payout or capital return should the leadership team feel no suitable opportunities exist. Service Stream paid a 5 cents per share capital return in FY16.

Service Stream is a business the fund is happy to hold, with a still-considerable runway of growth opportunities ahead of it, strong balance sheet and highly capable management team.

Service Stream Dividend

The Service Stream dividend has been rising nicely over the past few years.

Source: ASX

In the past 12 months, Service Stream has paid fully franked dividends totalling 6 cents per share.

With the Service Stream share price currently trading at $1.52, the SSM shares trade on a fully franked dividend yield of 3.95 per cent, or 5.6 per cent when grossed up for franking credits.

The Service Stream dividend yield is relatively attractive, especially given interest rates are likely to remain at these current low levels well into 2019.

From a valuation perspective, Service Stream shares trade on around 16 times earnings, a fair valuation given the company’s growth prospects. 

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au