Dividend Stocks You May Not Know (Part II)

Includes: CSS, HSKA, SUP, UNTD
by: Vince Martin

On Friday, I published Part I in this series, focusing on high-yield stocks (yielding at least 3%) which may be unknown to the average investor. Obviously, this group is dominated by small- and mid-cap stocks, which can provide more volatility than the traditional large-cap dividend stocks often favored by income investors, names such as Procter & Gamble (NYSE:PG) and Coca-Cola (NYSE:KO). Still, the list focuses on dividend safety and quality. These companies have strong business models, balance sheets and/or dividend policies. They offer good yields with the potential for capital appreciation, and, in some cases, increased dividends in the future. Here are four more interesting dividend plays, with Part III coming later in the week:

1. CSS Industries (NYSE:CSS)
Closing Price 3/27: $19.89
Dividend (Yield): $0.60 (3.02%)

The maker of gift wrap, bows, ribbons and other "seasonal expression" products, as the company calls them, has been a cash flow machine over the last few years. Between fiscal 2008 and fiscal 2011 (ending in March), CSS generated a total of $112 million in free cash (free cash flow minus net interest expense), well over half of its current market capitalization.

Free cash generation is negative through the first nine months of FY12, but this appears to be due to the company's billing procedures. A look at the SEC filings reveals that FCF has been negative after each third quarter during the last four years - all of which wound up with substantially positive free cash generation. Accounts receivable increase through the year, and then are converted to cash in the fourth quarter.

This also means that the company's balance sheet will strengthen. CSS already has 60 cents per share in cash net of long-term liabilities. It appears likely that the number will rise to somewhere in the $4-$5 range per share, based on the company's historical year-end cash numbers and the strength of earnings.

Those earnings - $1.64 for the trailing twelve months, excluding one-time restructuring charges - look solid at Tuesday's close of $19.89, with the P/E sitting just above 12. That said, over the last few years, the company has shown declining revenue, and earnings have been volatile. But continuing cost savings from the aforementioned restructuring should help the company continue to generate impressive cash flow relative to its roughly $200 million market capitalization.

CSS has paid its dividend for nine consecutive years, though the last raise came in 2008. Given the company's low payout ratio - about 22% of free cash flow between 2008 and 2011 - there could be room for another raise once the company's restructuring process is finished. (That process has included merging divisions and selling off product lines, along with the closing of a plant in Memphis.)

CSS is not a "sexy" pick, but its consistent cash flow and reasonable yield make it an safe pick for long-term income investors. Another dividend raise or further margin improvement through the company's realignment efforts could add capital appreciation to the mix as well.

2. Heska Corporation (NASDAQ:HSKA)
Closing Price 3/27: $11.51
Dividend (Yield): $0.40 (3.47%)

Heska is an interesting stock - a dividend payer with a reasonable yield, but also a growth stock with a relatively high valuation. The maker of veterinary diagnostic equipment and treatments earned 40 cents per share in 2011, placing its trailing P/E near 30. Soon after releasing full-year earnings, the company authorized a 10-cent quarterly dividend, the first in Heska's history.

Despite the high payout ratio - 100% on a trailing twelve-month basis - the company noted that it "intends to pay a regular quarterly dividend of $0.10 per share to its stockholders for the foreseeable future." This commitment appears to show management's confidence in its ability to grow earnings.

The payout ratio is better on the free cash flow side, but this is still a risky play, particularly by dividend stock standards. Heska's high valuation and high payout ratio mean the company must execute and continue to grow its earnings. If the company slips up in its growth process, it will likely not only hurt the stock price, but threaten the dividend. Revenue growth in 2011 was only 7.3% year-over-year, raising questions about Heska's long-term growth prospects; margin improvement can only create so much earnings growth before higher sales need to carry the company.

There is also the issue of the company's small float - just 4.5 million shares - which can create significant swings. With much of the valuation centered on potential earnings growth, any misstep by the company can cause severe damage to the stock price, damage that would likely be amplified by the low float and thin volume.

Of course, if the company can succeed, its current price below $12 per share would make the stock a bargain. In short, Heska is atypical of the usual dividend stock. It is a high-risk, high-reward play. But that may not necessarily be a bad thing.

3. Superior Industries (NYSE:SUP)
Closing Price 3/27: $19.57
Dividend (Yield): $0.64 (3.27%)

The maker of aluminum wheels for trucks and automobiles is a long-term dividend payer, having paid quarterly dividends without interruption since 1990. While the payout has not been raised since 2005, its level has been maintained, even through the horrific auto market of 2008-09.

The safety of the payout is enhanced by Superior's $4.71 per share in net cash, enough to pay for over seven years' worth of dividends at the current rate.

While the dividend seems safe, there are valuation concerns. The trailing EPS of $2.46 per share was inflated by a substantial income tax benefit; excluding the net tax benefit for the year, 2011 earnings were $1.54 per share. Going forward, analysts expect profits to decline despite modest growth in revenue; 2012 EPS is forecast at $1.12, with 2013 earnings at $1.16 per share.

At those levels, the payout ratio would exceed 50%. While the cash balance should cushion the dividend - as it did in 2008 and 2009 - such a high payout ratio would seem to lessen the chances of another dividend raise. SUP is again hitting mid-term resistance just below $20 per share. It has failed in its previous attempts to break through. If that resistance knocks the stock back down, the strong balance sheet, the strength of the U.S. auto industry and a yield north of 3% would make SUP an interesting long-term income play.

4. United Online (NASDAQ:UNTD)
Closing Price 3/27: $5.06
Dividend (Yield): $0.40 (7.91%)

The operator of NetZero and Juno Online - in addition to florist FTD and online properties Memory Lane and MyPoints - brought back some memories of the late 1990s last week. In a partnership with Clearwire (CLWR), United Online is offering free 4G wireless access under the NetZero brand, which was known for offering free dial-up Internet services a decade ago.

The move into 4G wireless is a necessary one for United Online, which is seeing severe revenue declines in its Communications segment, which includes NetZero and Juno. Net sales for the segment fell 24% in 2011, after a 21% drop in 2010, according to the company's most recent 10-K. The online business has struggled as well, while FTD has shown modest growth. The result is a 9% drop in net revenue from 2009 to 2011.

Still, UNTD continues to generate impressive cash flow - $85 million in 2011, some 18% of market capitalization and more than double the $37 million paid in dividends. The negative growth in the Communications and Content and Media segments belies the fact that both divisions are still solidly profitable, contributing over half of the company's total operating income.

If United Online continues on its single-digit negative growth rate, it still appears to be fairly valued. The "cigar butt" properties of NetZero and Juno's dial-up businesses should generate cash flow for a few more years. The online properties, though struggling, should remain profitable. FTD is showing top-line growth, and now represents 65% of the company's total sales. With the high yield and low cash flow multiple, there is a strong downside cushion. If the company can find a way to add profit from its Clearwire partnership - which requires little upfront investment and should see strong margins - UNTD is undervalued. Investors can collect a handsome yield while they wait on the answer.

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