Mid-cap stocks can be an interesting asset class for investors seeking above-average capital appreciation. Due to their smaller size they offer the potential for easier above-average growth and are theoretically not as risky as small-caps or micro-caps. When you can find mid-caps that also offer dividends you're offered an additional bonus. However, this particular asset class does require a more comprehensive due diligence effort.
The following table summarizes five mid-cap dividend growth stocks that appear to be attractively valued, and lists them in order of dividend yield highest to lowest. From left to right, the table shows the company's stock symbol and name. Next, two valuation metrics are listed side-by-side, the current P/E ratio followed by the historical normal P/E ratio for perspective. Then the five-year estimated earnings per share growth is shown next to each company's historical EPS growth providing a perspective of the past versus the future growth potential of each company. The final three columns show the current dividend yield, the company sector and its market cap.
A Closer Look at the Past and the Future Potential
Since a picture is worth 1,000 words, we'll take a closer look at the past performance and future potential of each of our five candidates through the lens of F.A.S.T. Graphs™.
Earnings Determine Market Price: The following earnings and price correlated historical graphs clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings. The historical normal P/E ratio line (dark blue line with*) depicts a P/E ratio that the market has historically applied.
The orange true worth™ line and the blue normal P/E ratio line provide perspectives on valuation. The orange line reflects the fair value of each company's earnings relative to its growth rate achievement, and the blue line reflects how the market has traditionally valued the company's stock relative to its fair value. The blue line represents a trimmed historical normal P/E ratio (the highest and lowest P/Es are trimmed). These lines should be viewed as barometers or aids for ascertaining sound buy, sell or hold decisions. Rather than seen as absolutes, they should be seen as guides to better thinking.
CTC Media, Inc. (CTCM)
About CTC Media, Inc. Directly from their website:
CTC Media is a leading independent media company in Russia, with operations throughout Russia and elsewhere in the CIS. It operates three free-to-air television networks in Russia - CTC, Domashny and DTV (operates under "Peretz" brand and logo from October 2011) - as well as Channel 31 in Kazakhstan and a TV company in Moldova, with a combined potential audience of over 150 million people. The international pay-TV version of the CTC channel is available in North America, Israel, Germany and the Baltic states. CTC Media also has its own TV content production capabilities through its subsidiary Story First Production. The Company's common stock is traded on The NASDAQ Global Select Market under the symbol "CTCM".
The consensus of 18 leading analysts reporting to Capital IQ forecast CTC Media Inc.'s long-term earnings growth at 25%. CTC Media Inc. has low long-term debt at 0% of capital. CTC Media Inc. is currently trading at a P/E of 10.6, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 30. If the earnings materialize as forecast, CTC Media Inc.'s True Worth™ valuation would be $76.29 at the end of 2017, which would be a 43.5% annual rate of return from the current price.
Dr Pepper Snapple Group, Inc. (DPS)
About Dr Pepper Snapple Directly from their website:
Dr Pepper Snapple Group, Inc. is the leading producer of flavored beverages in North America and the Caribbean. Our success is fueled by more than 50 brands that are synonymous with refreshment, fun and flavor. We have 6 of the top 10 non-cola soft drinks, and 11 of our 14 leading brands are No. 1 in their flavor categories. In addition to our flagship Dr Pepper and Snapple brands, our portfolio includes Sunkist soda, 7UP, A&W, Canada Dry, Crush, Mott's, Squirt, Hawaiian Punch, Peñafiel, Clamato, Schweppes, Rose's and Mr & Mrs T mixers.
The consensus of 16 leading analysts reporting to Capital IQ forecast Dr. Pepper Snapple Group, Inc.'s long-term earnings growth at 11.0%. Dr. Pepper Snapple Group, Inc. has low long-term debt at 41%of capital. Dr. Pepper Snapple Group, Inc. is currently trading at a P/E of 13.9, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Dr. Pepper Snapple Group, Inc.'s True Worth™ valuation would be $72.92 at the end of 2017, which would be a 14.5% rate of return from the current price.
FutureFuel Chemical Company (FF)
About FutureFuel Chemical Company Directly from their website:
FutureFuel Chemical Company is a leading manufacturer of diversified chemical products and biobased products comprised of biofuels and biobased specialty chemical products. In its chemicals business, it manufactures specialty chemicals for specific customers (custom manufacturing) as well as multi-customer specialty chemicals (performance chemicals). Its custom manufacturing product portfolio includes a bleach activator for a major detergent manufacturer, a proprietary herbicide and intermediates for a major life sciences company, and chlorinated polyolefin adhesion promoters and antioxidant precursors for a major chemical company. The performance chemicals product portfolio includes polymer (nylon) modifiers and several small-volume specialty chemicals for diverse applications. In its biofuels segment, the company predominantly produces biodiesel.
The consensus of 2 leading analysts reporting to Capital IQ forecast FutureFuel Corp.'s long-term earnings growth at 20%. FutureFuel Corp. has low long-term debt at 0% of capital. FutureFuel Corp. is currently trading at a P/E of 14.7, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 24. If the earnings materialize as forecast, FutureFuel Corp.'s True Worth™ valuation would be $49.52 at the end of 2017, which would be a 29.2% rate of return from the current price.
ClickSoftware Technologies (CKSW)
About ClickSoftware Technologies Directly from their website:
ClickSoftware is the leading provider of automated workforce management and optimization solutions for every size of service business. Our portfolio of solutions, available on demand and on premise, creates business value through higher levels of productivity, customer satisfaction and operational efficiency. Our patented concept of 'continuous planning and scheduling' incorporates customer demand forecasting, long and short term capacity planning, shift planning, real-time scheduling, mobility and location-based services, as well as on-going communication with the consumer on the expected arrival time of the service resource.
As the pioneers of the 'W6' concept more than 20 years ago, we have perfected solutions for solving a wide variety of problems on Who does What, for Whom, with What, Where and When. The combination of proven technology with educational services helps businesses find the right balance between reducing costs, increasing customer satisfaction, employee preferences and industry regulations/legislation. ClickSoftware's solutions manage hundreds of thousands of resources in service businesses across a variety of industries and geographies. Our flexible deployment approach, breadth and depth of solutions and strong partnerships with leading CRM/ERP vendors and system integrators makes us the number one choice to deliver superb business performance to any organization. The Company is headquartered in the United States and Israel, with offices across Europe, and Asia Pacific.
The consensus of 1 leading analyst reporting to Capital IQ forecast ClickSoftware Technologies' long-term earnings growth at 49%. ClickSoftware Technologies has low long-term debt at 0% of capital. ClickSoftware Technologies is currently trading at a P/E of 23.3, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 48. If the earnings materialize as forecast, ClickSoftware Technologies' True Worth™ valuation would be $132.09 at the end of 2017, which would be a 55.1% rate of return from the current price.
Guess Inc. (GES)
About Guess Inc. Directly from their website:
Guess?, Inc. designs, markets, distributes and licenses a lifestyle collection of contemporary apparel, denim, handbags, watches, footwear and other related consumer products. Guess? products are distributed through branded Guess? stores as well as better department and specialty stores around the world. As of October 29, 2011, the Company directly operated 495 retail stores in the United States and Canada and 232 retail stores in Europe, Asia and Latin America. The Company's licensees and distributors operated an additional 790 retail stores outside of the United States and Canada.
The consensus of 16 leading analysts reporting to Capital IQ forecast Guess, Inc.'s long-term earnings growth at 12.5%. Guess, Inc. has low long-term debt at 1% of capital. Guess, Inc. is currently trading at a P/E of 11.3 which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Guess, Inc.'s True Worth™ valuation would be $88.80 at the end of 2017, which would be a 18.8% rate of return from the current price.
Summary and Conclusions
The five mid-cap selections covered in this article are offered as aggressive opportunities for above-average capital appreciation with the potential for an increasing in dividend income stream. With the exception of Dr. Pepper Snapple, these companies currently carry no long-term debt. However, they all represent higher risk than would be found with many larger capitalized blue chips. On the other hand, the risk reward opportunities with each may well be worth taking.
With just a quick glance at the above graphs the reader can learn a lot about the company's history and reasonable expectations for future growth. But, due to the riskier nature of these companies and their businesses, a more comprehensive due diligence effort is highly recommended. Two of these companies are international; CKSW is headquartered in Israel and CTCM in Russia. In other words, although these may not be the most conservative selections to consider, they do all appear to have excellent prospects for above-average future growth and at least reasonable valuations.
I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.