This Micro Cap Dividend Play Deserves a Spot on Your Watch List

Mar. 02, 2011 1:52 PM ETRMCF, MCD, YUM26 Comments
The Dividend Pig profile picture
The Dividend Pig

Company Overview: Rocky Mountain Chocolate Factory (NASDAQ: RMCF) is an international franchisor and confectionery manufacturer. The Company is engaged in the manufacture of a range of chocolate candies and other confectionery products.

Note: Rocky Mountain Chocolate's fiscal year ends in February. So for example, FY 2010 ended in Feb. 2010. This past year is referred to as FY 2011

Fundamentals: Rocky Mountain Chocolate Factory is a small company, mostly comprising franchised retail stores and kiosks. Formed in 1982, and with a market cap of just 62 million, this is not the typical dividend paying company. I hesitate to even it call it that, since its dividend history is so short, paying its first full year of dividends in 2004 at 10 cents a share.

The company began raising its dividend every year, but quickly realized it did not have the earnings power to do so. It's been stuck at the current annual rate of 40 cents since 2009, and when 2010 earnings declined 3.3% from 2009, the payout ratio reached an unhealthy 69%. This graph shows the increasing payout ratio over the years.

payout graph

(Click charts to expand)

Looking at dividends in relation to cash flow, we see a different picture. 2010's 5 million dollars in free cash flow was more than enough to cover the 2.4 million dividend payments. And unlike earnings, free cash flow has seen steadier growth, averaging 10.3% annually for the past decade.

Particularly problematic for RMCF has been sales and earnings. Revenues have grown by only 25% over the past decade; this is not average annual growth, but TOTAL growth. Sales of 22.6 million in 2001 peaked in 2008 at 31.9 million, and RMCF has been losing sales since, down to 28.4 million in 2010. FY 2011 looks a bit more promising, and though Fy 2011 numbers are not in yet, I expect an increase.

This article was written by

The Dividend Pig profile picture
I am an individual investor that invests in dividend paying stocks. I look for solid businesses that consistently generate profit, and share that money with investors through growing dividends.

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