Investors have been transforming their portfolios over the past couple of years in response to historically low bond yields, substituting conservative dividend-paying stocks for bonds or cash in order to produce more income. Here at Seeking Alpha, there is tremendous discussion about this topic, but I have found that it tends to be focused on very large, well-known names, particularly in the Consumer Staples, Healthcare or other more "stable" sectors.
Last fall, I suggested that Dividend Growth Investors expand their horizons a bit and consider "High Quality Financials", a recommendation that was met with a lot of skepticism based on the comments I received. My point isn't to go back and say "I told you so", but there were some tremendous moves from the majority of the names discussed, with many outpacing the market and certainly outperforming the Consumer Staples and Utility sectors, for instance.
Today, I want to shift the focus towards small cap stocks with certain positive characteristics. After starting the year strongly, small caps are trailing larger companies in 2012. Over the past year, the S&P 500 price has increased 5%, while the Russell 2000 has dropped 2%. I spend a lot of time looking at smaller companies, and, while it's always difficult to generalize, I see all sorts of bargains these days. Among the bargains are names that should appeal to conservative investors. Sure, some of the names are relatively illiquid, with quality more difficult to judge than more familiar names perhaps, but, in the end, risk isn't eliminated by going with large companies.
In order to highlight some potential opportunities, I created a screen with Baseline. Here are the parameters:
- Market Cap > $100mm
- Net Debt to Capital < 5%
- 1-year EPS Growth Rate > 0%
- Trailing PE < 13X
- Dividend Yield > 3%
- Payout Ratio < 50%
- 5-year Dividend Growth > or = 0%
Here are the 7 names that qualified, sorted by dividend yield:
Keep in mind that these aren't recommendations. Screening is the first part of a process that includes a more thorough investigation of the potential investments.
I have included a few other columns besides the factors I screened on. First, most of these stocks trade relatively close to tangible book value, with one, CSS Industries (CSS), actually trading below the value of its net hard assets. I also included the number of dividend increases over the past five years. Note that three have increased the dividend each year.
Finally, I checked the most recent proxy for each name in order to see how much insider ownership exists at each company. Generally, there is considerable alignment in this regard with outside shareholders, with several names having double-digit ownership. I have found that when the board and the executives own stock, the company tends to be run more conservatively. Additionally, dividend cuts seem less likely to occur when there is large insider ownership.
Universal Insurance (UVE) doesn't look as attractive to me as some of the others despite the higher yield. It is the only one that hasn't grown the dividend over the past five years. In fact, after rising, it has decreased in recent years. I include it because it made the cut, but note that this Florida property and casualty insurance company has substantial geographic concentration risk.
Communications (JCS), based in Minnesota, operates four companies involved in various aspects of communication equipment and IT solutions on a global basis. The company seems to have a strong culture of internal promotion. Most recently, it named an eleven-year veteran as its CEO last May. The company has no sell-side coverage, and, only 39 Seeking Alpha readers are signed up for email alerts on the name. Since printing an all-time high near 21 last July, the stock has lost over 1/3 of its value despite earnings that continue to grow.
Community Trust Bancorp (CTBI) is based in Kentucky (the state's largest), with $3.6 billion in assets. Commercial Real Estate loans comprise 36% of the loan portfolio, with other commercial loans accounting for 15% and construction loans for 7%. Consumer loans comprised 18% of loans, with residential mortgages accounting for the remainder. The bank owns 70 of its 80 branch locations. Credit has been improving lately. Earnings growth has certainly been constrained by slow loan demand. Note that the company targets its dividend payout ratio at <45%. I find their disclosure in the 10-K to be quite rare: They lay out their goals for EPS (2.55-2.71 vs. 2.54 in 2011) and several other line items and also compare former goals and the subsequent results. This stock is trading at a significant discount to its ten-year median PE (14X) and P/TB (2.2X).
Village Super Market (VLGEA) struggled during the Great Recession but appears on the way to posting record earnings. It's dividend has retreated slightly in recent years as earnings have pulled back, but note that the company paid additional substantial special dividends, including $1.25 in 2010 and $1.50 in 2008. The company owns almost 14% of Wakefern, which was organized in 1946 and is the nation's largest retailer-owned food cooperative. The entire group operates 284 supermarkets, with 76 operated directly by Wakefern. Members are entitled to use the ShopRite name, and VLGEA operates 28 in NJ, MD and PA.
I have owned National Bankshares (NKSH) in my Conservative Growth/Balanced Model Portfolio since the end of 2010, though we have adjusted position size several times. I detailed this entire portfolio at year-end, and it has performed well this year, besting the 60/40 stock/bond index by about 2% through 4/20. NKSH operates in southwestern Virginia and produced record earnings in 2011 despite continuing loan growth challenges. It has increased its dividend every year since coming public in 1996.
Cato (CATO) is also a member of my Conservative Growth/Balanced Model Portfolio. This retailer is focused on younger women in the Southeast, with three different concepts aimed at the low-end. The recent growth has been challenged by continuing high unemployment, but the company is posting record earnings. The company has $8 per share in cash/investments and no debt. The top five executive officers average 25 years with the company.
The last stock is CSS Industries (CSS), which is number three behind Hallmark and American Greetings (AM). This seller of seasonal goods (cards for Christmas, Valentine's Day, Easter and Halloween) doesn't look that interesting to me - the business doesn't appear to be growing. Fellow Seeking Alpha contributor Frank Voisin recently shared his views, and I think he called it right.
So, hopefully one or more of these will prompt you to explore further, potentially filling a need in your portfolio for attractive dividends with growth potential.
Disclosure: I am long CATO and NKSH in models at InvestByModel.com