Cimatron Is Going Dividend Crazy

| About: Cimatron, Limited (CIMT)

High-dividend paying stocks have become very popular after a decade of flat stock returns. In the 80s and 90s, investors didn't object much to low dividends as most stock markets were handing them a double-digit annual rate of return on capital appreciation alone. But now the larger companies paying a 5% or higher yield are much sought after. Investors typically look to the bigger, more stable companies for a good dividend. But if you look hard enough, you can find some stellar dividend payers among the small, obscure companies.

LinkCimatron (NASDAQ:CIMT) is a case in point. This is a very small Israeli company that makes computer-aided 2D and 3D drawing products for manufacturing. As you might guess, it is very sensitive to the global economy. The recession slammed the company, but it is storming back:

(Click charts to enlarge)

It seems to be getting better at recovering from recessions even though this last one was much worst than the one before. The cash flow recovery is monstrous. With this kind of growth, you expect to pay around a 20 or higher price-to-cash flow ratio [except for (Apple)]. But with CIMT you pay only 8.9 - way cheaper even than AAPL's 12.

CIMT has what I call an inverted cash flow curve, meaning that, over the years, cash flow from operations grows faster than revenue. In bond yields, an inverted yield curve is bad. In stocks, it's very good. These often wind up being good dividend payers. CIMT has been a good dividend stock for years paying 5% a few months back and around 8% at the start of this month. But now it has gone just plum crazy. As the details from this news release relate, the Israeli courts have approved a much higher total payout and the dividend was set at $.71 or about 18% for CIMT.

As near as I can tell, this is just for the next one-year period. I don't know if the company must reapply each year for a high dividend, but it seems quite focused on rewarding its shareholders.

Is it being irresponsible with the company's finances ? Is this an unsustainable flash in the pan from a small fly-by-night ? Stanley Barton had an interesting article 2 "Shadowy" Growth Stocks With 5% Payouts back in February here at SA where he explained how to look at the soundness of a dividend. He simply compares the payout with the free cash flow being generated and with the cash the company has in the bank. He compares AT&T (NYSE:T) with its small "shadow" Telular (NASDAQ:WRLS), another favorite of mine. You want both these ratios to be low, preferably below 100%. His T vs WRLS decision:

Dividend as % of Levered Free Cash Flow: T = 382%, WRLS = 54%

Dividend as % of Cash: T = 326%, WRLS = 50%

WRLS is by far the more sound dividend. CIMT's current numbers with the monster 18% are around a 150% ratio with free cash flow and a 56% ratio with cash. The ratio with cash flow is a little higher than you'd like, but with a strong growth of that cash flow, it's not a killer.

Will there be continued strong growth? The ownership seems very confident about that. About 67% of the shares are held by insiders if you define that to be everyone other than the trading public. Only a third of the shares are the float. The 2/3 are probably much better informed on future growth than us trading public. And who goes to court to plead with the judge to allow it to throw vast sums of money to shareholders unless they are supremely confident ? Most companies are in court to direct money flow in the opposite direction.

Technically, it is threatening a breakout run:

There was a false breakout back in November from the trading range it has been in for a year. With the massive dividend boost powering it now, this time could be different.

Disclosure: I am long CIMT, WRLS.