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Highway Holdings (NASDAQ:HIHO) declared a semi-annual dividend of $.20, payable on December 8, 2006 to shareholders of record on November 28, 2006. The company also paid a $.20 dividend in August.

Even after the dividend and the recent purchase of Golden Bright Plastic Manufacturing, Highway Holdings will still have plenty of cash left on the balance sheet. However, it is important to remember that the company generated a lot of that cash by selling off an unprofitable legacy business and certain trademarks. HIHO will not earn $.40 next year (no analysts cover the company but I expect somewhere between $.22 and $.30 from operations). Therefore, if it decides to maintain the dividend rate, it will cut into the company's cash hoard.

I really like what HIHO management is doing here. In the course of the past year, they have divested unprofitable businesses, deployed capital efficiently to acquire a new, highly profitable operation, and returned a substantial chunk of excess capital to shareholders.

Any microcap of this size should be considered speculative (especially a Chinese microcap) but to me this is a speculation worth taking. I am long the stock from $3.50 (really $3.30 if you adjust for the dividend I received in August) and will likely buy more this week.

DISCLOSURE: I am long HIHO.

Source: Chinese Microcap Highway Holdings Doing The Right Things