3 Small-Cap Dividend Champions With Quality And Value

 |  Includes: CTBI, EFSI, TMP
by: On Base

Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.


In this article, I identify small-cap stocks that are attractive for dividend growth investing. The expectation is that we can identify small-cap companies with quality, and fair value, that will grow earnings and dividends at an acceptable rate. Relatively small publicly traded corporations with a total market capitalization of less than $2.3 billion are typically considered small-capitalization, or small-cap, stocks. Market capitalization is the market price per share of the company multiplied by the number of outstanding shares.

As a starting point, I used the dividend champions list from David Fish's Champions, Contenders and Challengers Oct. 31, 2013, compilation (the CCC List) to identify candidates for a dividend growth portfolio. These champions are U.S. and American Depository Receipt (ADR) companies that have increased their dividend annually for at least 25 years. So, we expect these companies to be financially strong and to remain in business for years to come. By focusing on companies with long-term dividend growth we're looking at a relatively few small-cap companies out of the small-cap group, which is weighted toward young, potentially fast-growing companies.

The World of Small-Cap Dividend Champions

Of the 105 dividend champions on the CCC List, 30 are small-cap companies. So, small caps comprise 29% of the dividend champions. However, the 30 small caps collectively comprise only 1% of the $3.2 trillion capitalization of all 105 champions. In other words, by focusing on small caps, we ignore other companies that make up 99% of the market's value. This focus should give us a few good companies with simple businesses to consider for our investment.

Small-Cap Benchmarks

Small-cap companies are tracked by fewer analysts and are often not considered by institutions because of the relatively small number of shares and small trade volume. A company's membership in the small-cap group is sensitive to market conditions. At least one company I consider here, Lancaster Colony Corp. (NASDAQ:LANC), has graduated from a small cap (at $2.26 billion) to a mid-cap (at $2.34 billion) during the 22 days following publication of the CCC List.

To view the broad small-cap market we can use the following indexes:

The Russell 2000 Index tracks the stocks of the 2,000 smallest companies in the Russell 3000 index. Companies in the Russell 2000 have an average market capitalization of $665 million. The index is considered a benchmark for small-cap investments. Companies on the Russell 2000 Index comprise 8% of the market value of U.S. stocks. We see that a focus on companies that have delivered dividend growth for over 25 years reduces the market cap of the companies we are considering substantially (from the capitalization of 8% in the Russell 2000 to the 1% for our small-cap dividend champions).

The S&P SmallCap 600 Index tracks 600 U.S. stocks chosen for market size, liquidity, sector representation and other factors. The SmallCap 600 Index is intended to track companies with market caps in the range of $300 million to $1.4 billion. The index has significant representation outside of this range. Many of the stocks now in the index have individual market caps above $3.7 billion, such as Extra Space Storage (NYSE:EXR), Eagle Materials, Inc. (NYSE:EXP), and Cubist Pharmaceuticals (CBST). The top 10 companies by weight in the index all have market caps above $2.61 billion. These 10 companies make up 5.8% of the index. The smallest company in the index has a market cap of $70 million. The average capitalization, as reported by S&P, is $858 million.

My Analysis of the Small-Cap Dividend Champions

In this analysis, I determined quality by examining the financial strength, and safety (stability) of each small-cap dividend champion. I also examined the value, based on the price of the stock relative to its earnings, of each small-cap dividend champion for possible inclusion in a dividend growth portfolio. I urge readers to examine the current yield and growth of yield of companies in my final selection to determine if the stock is suitable for their dividend growth portfolio.

I first identified the financial strength and safety rating of the companies that are published by ValueLine (VL). I obtained these ratings through my public library. Financial strength is the key requirement in the stock selection process. Safety defined as stability by VL is another important feature. VL ranks the financial strength and safety of 1,700 companies. Strength is rated from A++ to C, in nine steps. VL's safety ranking ranges from 1 (highest) to 5 (lowest). Consistent with my previous article, I considered a VL strength rating of B+ or better, and a 1 or 2 rating for safety. The VL ratings qualify eight of the small-cap dividend champions that are listed in the following table.

Eight Small-Cap Dividend Champions with Financial Strength and Safety as Rated by ValueLine
Company Name Stock Symbol Strength Safety
American States Water AWR A 2
Diebold Inc. DBD A 2
Lancaster Colony Corp. LANC A+ 1
MGE Energy Inc. MGEE A 1
Middlesex Water Co. MSEX B++ 2
Northwest Natural Gas NWN A 1
RLI Corporation RLI B++ 2
Tootsie Roll Industries TR A 1
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ValueLine publishes ratings for only 18 of the 30 small-cap dividend champions that I am considering here. So, I evaluated the financial strength of the remaining 12 small-cap champions using the financial data provided by S&P Netadvantage that I availed through my public library. I considered a company to have satisfactory financial strength if it consistently increased revenue and earnings per share from 2007 to the present. Additionally, I qualified one small-cap champion, EFSI, not ranked by either VL or Netadvantage, on the basis of increasing net income and increasing net tangible assets in the period from Dec. 31, 2010, to Dec. 31, 2012 (as per Yahoo Finance).

Additionally, I evaluated the safety (stability) of these 18 small-cap stocks based on their beta coefficient. A beta coefficient near 1.0 indicates that the stock value experiences the average variation of the market; a coefficient below 1.0 indicates that the stock value varies less than the market as a whole; a small negative coefficient indicates that the stock value varies less than the market and is negatively correlated with the market. The seven small-cap dividend champions, qualified on financial strength and safety, are shown in the following table.

Seven Small-Cap Dividend Champions with Strength and Safety as Rated by Financial History and Beta Coefficient
Company Name Stock Symbol Financial Strength Beta Coefficient
Computer Services Inc. CSVI Strong -0.1
Community Trust Banc. CTBI Strong 1.09
Eagle Financial Services EFSI Strong 0.19
Raven Industries RAVN Strong 0.88
Stepan Company SLC Strong 0.77
Tompkins Financial Corp. TMP Strong 0.68
Weyco Group Inc. WEYS Strong 0.54
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Finally, valuation is important. All 30 small-cap dividend champions are tracked by Carnevale's FAST Graphs. In the following table, I show the small-cap champions that meet my financial strength, and stability criteria, and have "fairly valued" or "undervalued" stock offerings based on my reading of the FAST Graphs. I offer these three companies as the starting point for consideration as a small-cap component to your dividend growth portfolio.

Three Small-Cap Dividend Champions to Consider for a Dividend Growth Portfolio
Company Name Stock Symbol Value Market Cap, million $ Years of Increasing Dividends Annual Yield, percent
Community Trust Bancorp CTBI Fairly Valued 660 33 3.01
Eagle Financial Services EFSI Moderately Undervalued 72 27 3.58
Tompkins Financial Corporation TMP Fairly Valued 712 27 3.24
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Community Trust Bancorp, Inc. (NASDAQ:CTBI) was incorporated in 1980 in Kentucky. The company, through its subsidiaries, engages in commercial, personal banking, trust and wealth management activities. CTBI operates through 81 banking locations in eastern, northeastern, central, and south central Kentucky, as well as southern West Virginia and northeastern Tennessee. The corporation has four trust offices in Kentucky, and one trust office in northeastern Tennessee.

Eagle Financial Services, Inc. (OTCQX:EFSI) is a bank holding company incorporated in 1991, with its subsidiary Bank of Clarke County chartered under Virginia law. (The Bank of Clarke County must have been chartered prior to 1986 for its holding company to have achieved 27 years of continuous and growing dividends.) EFSI and its subsidiary grant commercial, financial, agricultural, residential and consumer loans to customers in Virginia and the Eastern Panhandle of West Virginia.

EFSI is among the smallest of the small-cap companies. With a market cap of $72 million, EFSI is a micro-cap company under the definition that a micro cap has a market cap below $100 million. Risk of owning shares of a micro-cap includes high price volatility and the lack of liquidity. Also, share price may be manipulated by rumor or false publicity around the finances of the company. Suggesting an adequate level of safety for EFSI is that its stock has traded in the range from $15.00 to $25.00 in the last four years. Also, EFSI has a low beta indicating that it experiences less volatility than the market as a whole. EFSI has paid a growing dividend for 27 years, including through the great recession (2008-09). Finally, as reported on Form 10-Q for the quarter ending Sept. 30, 2013, the share holder equity for EFSI is $65.4 million. With 3,400,711 shares outstanding, one share provides the owner with $19.24 in equity (which would be expected to flow to the stockholder in any liquidation). Currently, EFSI trades at $22.50 per share.

Tompkins Financial Corporation (NYSEMKT:TMP) is a financial holding company registered with the Federal Reserve Board. The company is a locally oriented, community financial services organization that offers a full array of banking products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management. TMP operates approximately 66 banking offices. The company was founded in 1836 and is headquartered in Ithaca, N.Y.

Comparison to Recent Recommendations for Investing in Dividend Champions

My selected small-cap dividend champions differ from the small-cap subset of dividend champions that was recently recommended, based on value. Here, I describe the different selections and, hopefully, explain the differences:

Chuck Carnevale (Champions in Value) recently presented 19 companies comprising his "Champions In Value Portfolio." These 19 companies span nine market sectors without regard to market cap. Carnevale states, "I have not thoroughly conducted research and due diligence on all of them. Therefore, I offer these 19 Dividend Champions as potential candidates that appear fairly valued. Therefore, the reader should conduct their own due diligence on any that might strike their fancy." Three of the companies that Carnevale offered are small-cap champions that I examined in the course of the work I presented here. These companies are MSA, CTBI and TMP. I, too, recommend CTBI and TMP.

I eliminated MSA based on an inadequate safety (stability) rating by VL. Looking further, I saw that MSA has a beta coefficient of 1.61, indicating that it is more volatile than most stocks in the public market. I respectfully submit that this is some of the additional diligence that Carnevale suggested, and I do not recommend MSA at this time.

I included a dividend champion, EFSI, that did not make Carnevale's recommended list. My interpretation of the FAST Graph is that this stock is moderately undervalued. Furthermore, I rate this dividend champion to have satisfactory financial strength and stability (low beta) and worthy of further consideration. However, with a market cap of $72 million, EFSI is the smallest dividend champion on the CCC list. You may deem the publicly traded shares to be too few to provide adequate liquidity for your portfolio.


Considering the financial strength, stability and value of small-cap dividend champions, I identified three financial companies that can add a small-cap component to a dividend growth portfolio. With the information provided here as a starting point, an investor should conduct their own due diligence to determine if the equities are suitable for their individual investing needs. Additional information, important to the investor, is the current yield (dividend) and growth of that yield. A good starting point for the diligence is the CCC List, including its history of dividends and its Tweed and Chowder ratings for these dividend champions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.