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In my previous posts (here and here), I described the best S&P 500 and the best S&P MidCap 400 dividend stocks according to Piotroski principles. In this article I describe the best small-cap dividend stocks which are included in the S&P SmallCap 600 index, according to the same principles.

A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems, I used one of them, the "Piotroski", in this article. The ranking system is based on investing principles of Joseph Piotroski, who is a former accounting professor at the University of Chicago, and an active value-based investor.

The "Piotroski" ranking system is quite complex, and it is giving weight of 50% to price-to-book value, and it is taking into account other factors like; growth margin, cash flow, debt, current ratio and return on assets, as shown in the Portfolio123's chart below.

In order to find out how such a ranking formula would have performed during the last 15 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took all the 7,014 stocks in the Portfolio123's database.

The back-test results are shown in the chart below. For the back-test, I divided the 7,014 companies into fifty groups according to their ranking. The highest ranked group with the ranking score of 98-100, which is shown by the dark blue column in the chart, has given by far the best return, an average annual return of about 24%, while the average annual return of the S&P 500 index during the same period was about 2.5% (the red column at the left part of the chart). Also, the second and the third group (scored: 96-98 and 94-96) have given superior returns. This brings me to the conclusion that the ranking system is useful.

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After running the "Piotroski" ranking system on the companies which are included in the S&P SmallCap 600 index and pay a dividend with a higher than 1% yield, on November 21, before the market open, I discovered the twenty best dividend stocks, which are shown in the chart below. In this article, I describe the first three stocks. In my opinion, these stocks can reward an investor a significant capital gain along with a solid dividend. I recommend readers use this list of stocks as a basis for further research. All the data for this article were taken from Yahoo Finance, Portfolio123 and finviz.com.

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Black Box Corporation (NASDAQ:BBOX)

Black Box Corporation, a communications system integrator, engages in designing, sourcing, implementing, and maintaining communications solutions worldwide.

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Source: company presentation

Black Box Corporation has a trailing P/E of 15.42 and a very low forward P/E of 11.87. The price-to-sales ratio is very low at 0.44, and the price-to-book value is also very low at 0.89. The price to free cash flow is very low at 7.34, and the average annual earnings growth estimates for the next five years is quite high at 10%. The forward annual dividend yield is at 1.34%, and the payout ratio is only 18.6%.

Most of Black Box Corporation's stock valuation parameters have been better than its industry median, sector median and the S&P 500 index, as shown in the table below.

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Source: Portfolio123

Black Box Corporation returns value to its shareholders by stock buyback and by increasing dividend payments, as shown in the charts below.

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Source: company presentation

On October 29, Black Box Corporation reported its second-quarter fiscal 2014 financial results.

Second-Quarter 2014 Highlights

  • Revenues were $246.8 million, down 5% from $260.2 million for the same period last year and consistent with $246.9 million in the sequential period.
  • Provision for income taxes was $5.7 million (50.3% effective rate), up 29% from $4.4 million (38.0% effective rate) for the same period last year and up 26% from $4.5 million (39.5% effective rate) in the sequential period. The increase in the effective tax rate is due to the write-off of certain deferred tax assets related to equity awards.
  • Net income was $5.6 million, down 22% from $7.1 million for the same period last year and down 19% from $6.9 million in the sequential period.
  • Diluted EPS was $0.35, down 18% from $0.43 for the same period last year and down 18% from $0.43 in the sequential period.
  • Operating net income* was $9.6 million, down 12% from $10.9 million for the same period last year and up 10% from $8.7 million in the sequential period.
  • Operating EPS* was $0.60, down 8% from $0.65 for the same period last year and up 11% from $0.54 in the sequential period.
  • Cash flow from operations was $8.9 million, down 50% from $17.8 million for the same period last year and down 57% from $20.5 million in the sequential period.
  • We returned $7.4 million to our shareholders by repurchasing $6.0 million of common stock and paying $1.4 million in dividends.

Black Box Corporation has compelling valuation metrics and good earnings growth prospects, and considering the fact that the stock is trading way below book value, BBOX stock can move higher. Furthermore, the solid dividend represents an income.

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Chart: finviz.com

SkyWest Inc. (NASDAQ:SKYW)

SkyWest, Inc., through its subsidiaries, operates a regional airline in the United States.

SkyWest has a very low trailing P/E of 13.11 and a very low forward P/E of 11.14. The price to book value is extremely low at 0.58, and the price-to-sales ratio is also very low at 0.25. The price-to-cash ratio is very low at 1.14, and the average annual earnings growth estimates for the next five years is at 6.60%. The forward annual dividend yield is at 1.00%, and the payout ratio is only 12.9%.

The SKYW stock price is 2.49% above its 20-day simple moving average, 6.94% above its 50-day simple moving average and 10.92% above its 200-day simple moving average. That indicates a short-term, mid-term and long-term uptrend.

Most of SkyWest's stock valuation parameters have been better than its industry median, sector median and the S&P 500 median, as shown in the table below.

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On November 06, SkyWest reported its third-quarter financial results, which beat EPS expectations by $0.05 and missed expectations on revenues. The company reported net income of $26.4 million, or $0.50 per diluted share, for the quarter ended September 30, 2013, compared to net income of $20.9 million, or $0.40 per diluted share, for the same period last year.

Third-Quarter Highlights

  • Increased pretax income 34.8% to $44.4 million, compared to $32.9 million
  • Increased fully-diluted EPS 25.0% to $0.50, compared to $0.40
  • Increased block hour production 2.8% to 613,821 block hours, compared to 596,901 block hours
  • Increased operating revenues by approximately $32.9 million (net of fuel, certain engine overhaul and landing fee pass through revenues), primarily related to rate escalations under SkyWest's agreements with its major partners and increased block hour production
  • Made cash payments of $22.9 million consisting of $11.5 million for the repurchase of 800,000 shares of treasury stock and $11.4 million for deposits on new aircraft
  • Increased total aircraft fleet to 756 aircraft as of September 30, 2013, compared to 739 aircraft as of September 30, 2012

SkyWest has compelling valuation metrics, and solid earnings growth prospects, and considering the fact that the stock is in an uptrend and is trading way below book value, SKYW stock still has room to go up. Furthermore, the solid dividend represents a nice income.

Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy, and the company's massive debt of $1.52 billion.

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Chart: finviz.com

AAR Corp. (NYSE:AIR)

AAR Corp. provides products and services to aviation, government, and defense markets worldwide.

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Source: company presentation

AAR Corp. has a trailing P/E of 21.87 and a very low forward P/E of 13.36. The price to free cash flow is very low at 10.38, and the price-to-sales ratio is also very low at 0.55. The price to book value is at 1.22, and the average annual earnings growth estimates for the next five years is quite high at 12%. The forward annual dividend yield is at 1.01%, and the payout ratio is only 21.7%.

The AIR stock price is 0.31% above its 20-day simple moving average, 4.59% above its 50-day simple moving average and 31.32% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

Most of AAR Corp's stock valuation parameters have been better than its industry median, sector median and the S&P 500 index, as shown in the table below.

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AAR Corp. will report its latest quarterly financial results on December 16. AIR is expected to post a profit of $0.48 a share, a $0.04 better than the company's actual earnings for the same quarter a year ago.

AAR Corp. has compelling valuation metrics, and good earnings growth prospects, and considering the fact that the stock is in an uptrend, AIR stock can move higher. Furthermore, the solid dividend represents an income.

Risks to the expected capital gain and to the dividend payment include a downturn in the U.S. economy, and the company's massive debt of $702 million.

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Chart: finviz.com

Source: Best Small-Cap Dividend Stocks According To Piotroski Principles