Best Small-Cap Dividend Stocks According To Buffett Principles

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 |  Includes: HMN, NWBI, PRA, SPTN
by: Arie Goren

Small-cap stocks have been the winner so far this year, as shown in the chart below.

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Source: spindices

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 Buffett 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 "All-Stars: Buffett" in this article. The ranking system is based on investing principles of the well-known investor Warren Buffett.

The "All-Stars: Buffett" ranking system is quite complex, and it is taking into account many factors like; book value growth, operational P/E, price to book value, trailing P/E, price to Tangible book value, price to cash flow and EPS Stability, 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 chart clearly shows that the average annual return has a very significant positive correlation to the "All-Stars: Buffett" rank. This brings me to the conclusion that the ranking system is useful.

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After running the "All-Stars: Buffett" 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 December 05, before the market open, I discovered the twenty best dividend stocks, which are shown in the chart below. In this article, I describe the four best stocks according to this ranking system. 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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Horace Mann Educators Corp. (NYSE:HMN)

Horace Mann Educators Corporation, through its subsidiaries, operates as a multi-line insurance company in the United States.

See my article from November 13, 2013.

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Chart: finviz.com

ProAssurance Corporation (NYSE:PRA)

ProAssurance Corporation, through its subsidiaries, provides medical and other professional liability insurance products to individuals and institutions engaged in the delivery of healthcare in the United States.

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Source: company presentation

ProAssurance has no debt at all, and it has a very low trailing P/E of 9.12 and a forward P/E of 15.25. The price to book value is at 1.26, and the average annual earnings growth estimates for the next five years is at 5%. The forward annual dividend yield is at 2.07%, and the payout ratio is only 18.8%.

The PRA stock price is 2.58% above its 20-day simple moving average and 5.03% above its 50-day simple moving average. That indicates a short-term and a mid-term uptrend.

ProAssurance has recorded revenue, EPS and book value growth, during the last year, the last three years and the last five years, as shown in the charts below.

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Source: company presentation

ProAssurance's margins and return on capital parameters have been better than its industry median, sector median and the S&P 500 median, as shown in the tables below.

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Source: Portfolio123

On November 06, ProAssurance reported its third-quarter financial results, which beat EPS expectations by $0.07. The company reported net Income of $63.4 million for the third quarter of 2013, and $226.7 million for the nine months ended September 30, 2013. Operating Income was $54.8 million for the quarter and $159.7 million for the nine months. Net Income per diluted share was $1.02 for the quarter and $3.65 for the nine months. Operating Income for the same periods was $0.88 and $2.57 per diluted share respectively. Book Value per Share is now $38.48.

ProAssurance has recorded revenue and EPS and growth, and considering its cheap valuation metrics, and its solid earnings growth prospects, PRA stock can move higher. Furthermore, the rich dividend represents a nice income.

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Chart: finviz.com

Northwest Bancshares, Inc. (NASDAQ:NWBI)

Northwest Bancshares, Inc. operates as the holding company for Northwest Savings Bank that offers various personal and business banking solutions, investment management and trust services, and insurance products.

Northwest Bancshares has a low long-term debt (long-term debt to equity is only 0.09), and it has a trailing P/E of 21.75 and a forward P/E of 21.56. The price-to-cash ratio is very low at 2.92, and the average annual earnings growth estimates for the next five years is at 5%. The forward annual dividend yield is quite high at 3.52%, and the payout ratio is at 71%.

The NWBI stock price is 3.98% above its 20-day simple moving average, 6.69% above its 50-day simple moving average and 13.45% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

Northwest Bancshares has recorded EPS and dividend growth and negative revenue growth during the last year, the last three years and the last five years, as shown in the table below.

On October 21, Northwest Bancshares reported its third-quarter financial results, which beat EPS expectations by $0.03. The company reported net income for the quarter ended September 30, 2013 of $17.6 million, or $0.19 per diluted share. This represents an increase of $1.9 million, or 12.2%, over the same quarter last year when net income was $15.7 million, or $0.17 per diluted share, and an increase of $4.1 million, or 30.6%, compared to the quarter ended June 30, 2013 when net income was $13.5 million, or $0.15 per diluted share. The annualized returns on average shareholders' equity and average assets for the current quarter were 6.18% and 0.88% compared to 5.37% and 0.78% for the same quarter last year and 4.79% and 0.68% for the quarter ended June 30, 2013.

Northwest Bancshares has recorded dividend and EPS growth and it has solid earnings growth prospects. Considering its latest quarter good financial results, and the fact that the stock is in an uptrend, NWBI stock can move higher. Furthermore, the very rich dividend represents a nice income.

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Chart: finviz.com

Spartan Stores Inc. (NASDAQ:SPTN)

Spartan Stores, Inc. operates as a grocery distributor and retailer principally in Michigan and Indiana.

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Spartan Stores has a low debt (total debt to equity is 0.41), and it has a trailing P/E of 18.98 and a low forward P/E of 14.08. The price to free cash flow for the trailing 12 months is very low at 12.59, and the average annual earnings growth estimates for the next five years is quite high at 10.0%. The price-to-sales ratio is very low at 0.19. The forward annual dividend yield is at 1.58%, and the payout ratio is only 28.8%. The annual rate of dividend growth over the past three years was very high at 21.60% and over the past five years was at 11.19%.

Spartan Stores has recorded solid revenue growth and strong dividend growth during the last year, the last three years and the last five years, as shown in the table below.

Most Spartan Stores' 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 October 23, Spartan Stores reported its second-quarter fiscal year 2014 financial results, which beat EPS expectations by $0.06. The company reported that consolidated net sales for the second quarter increased 4.5 percent to $649.5 million compared to $621.6 million last year, due to organic growth, contributions from a recent acquisition in the retail segment and new customers in the distribution segment. Adjusted earnings from continuing operations were $12.1 million, or $0.55 per diluted share, compared to $10.2 million, or $0.47 per diluted share, last year.

Spartan Stores has recorded revenue, EPS and dividend growth, and considering its cheap valuation metrics and its good earnings growth prospects, SPTN stock still has room to go up. Furthermore, the solid growing dividend represents a nice income.

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Chart: finviz.com

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.