10 Best Ideas From Royce & Associates

by: MyPlanIQ

Royce & Associates is a famed fund company that has many excellent funds in small cap stocks and dividend stocks. Royce Dividend Value (MUTF:RYDVX) is managed by Charles Royce, the founder of the company.

The fund seeks long-term growth of capital and current income. The fund primarily invests in a diversified portfolio of dividend-paying securities issued by mid-, small- and/or micro-cap companies. The fund invests at least 80% of net assets in equity securities that produce dividend income, and invests at least 65% in companies with stock market capitalizations of less than $5 billion at the time of investment. The fund may invest up to 25% of net assets in foreign securities.

Royce employs value and cashflow strategies in picking stocks that pay dividends. These stocks usually have low price earnings (PE) ratio and price/cashflow ratio. Compared with other large large cap value funds, the fund has the following ratios:

Averages RYDVX Category Avg
Price/Earnings 12.45 14.72
Price/Book 1.60 1.79
Price/Sales 0.97 0.91
Price/Cashflow 7.45 9.00
Median Market Cap 1.78K 1.85K
3 Year Earnings Growth 2.65% 3.90%

Here are the top 10 stocks in the fund as of 12/31/2011:

Top 10 Holdings (12.21% of Total Assets)
Company Symbol % Assets
Manning & Napier, Inc. Class A MN 1.52
Helmerich & Payne, Inc. Common HP 1.39
Kennametal Inc. Common Stock KMT 1.23
Ascena Retail Group, Inc. ASNA 1.22
Willis Group Holdings Public Li WSH 1.19
Nucor Corporation Common Stock NUE 1.17
Nu Skin Enterprises, Inc. Commo NUS 1.13
Reinsurance Group of America, I RGA 1.13
Allied World Assurance Company AWH 1.12
Landstar System, Inc. LSTR 1.11

Top one holding Manning & Napier is an asset management company. The asset management business is a good and steady cash flow producing business as long as the company manages assets conservatively, which is precisely what Manning & Napier has been doing. A more detailed analysis can be found here. The company just went public. Kennametal is a company that manufactures and supplies tools and components for production process. It sports 19% Return on Equity and 10% Return on Assets in the last 12 months, which are very solid. It produces 1.2% annual dividend. Nucor is the largest U.S. steel manufacturer. The company had a strong management and production process that traditionally have delivered double digit return on equity for shareholders. Recent steel competition and other issues have affected its business. However, with more competitive dollar devaluation and the leading recovery in the U.S. Manufacturing, Nucor can be seen to emerge out to be a solid cash flow producer again.

The following compares the fund's recent performance with two diversified dividend stock ETF portfolios:

Portfolio Performance Comparison

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
RYDVX 1% 3% 28% 114% 5% 14%
Retirement Income ETFs Strategic Asset Allocation Risk Profile 0 -1% 7% 32% 129% 2% 5%
Retirement Income ETFs Tactical Asset Allocation Risk Profile 0 -2% -7% 14% 69% 10% 51%

(Click to enlarge)

One can see that the fund outperforms the diversified strategic asset allocation portfolio by a big margin in the last 5 years (5% vs. 2%).

The takeaway is that the above 10 stocks can be good candidate stocks for dividend investors to do further research.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

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