Finding small cap companies that pay a dividend is no easy feat. At this stage in a company’s growth trajectory, cash flow is usually too erratic or is immediately put into growing the company.
However, there are those rare small cap jewels that offer yields above 3%. Aside from master limited partnerships (MLPs) and real estate investment trusts (REITs), there are hardly a dozen small caps that fit the bill. Here’s how you can find small caps with big potential.
Few and Far Between
Here are some of the results after screening for small caps with yields above 3% and that trade at least 50,000 shares daily: PetMed Express (Nasdaq: PETS), Orchid Paper Products Company (NYSE: TIS), Nutrisystem Inc. (Nasdaq: NTRI), and Silicon Motion Technology Corp. (Nasdaq: SIMO).
The biggest yield comes with PetMed Express at 5.10% and a reasonable trailing price-to-earnings (P/E) ratio of 14.63. The stock has pulled back considerably since its July high of $17.75. It now trades for just over $14. Even more surprising for a small cap, the company has no debt and has a cash hoard of $2.08 per share.
Another under-the-radar company is paper towel and tissue manufacturer Orchid Paper Products, with a 4.20% yield and trailing P/E ratio of 20.20. Orchid has been upgrading its machinery to produce more while costing the company less. The company is funding this through its cash coffer and has generated some debt, but the debt/EBITDA ratio will be at 0.58:1. This ratio is calculated by taking the company’s interest-bearing liabilities (minus cash) and dividing it by its earnings before interest, taxes, depreciation and amortization (EBITDA). A debt/EBITDA ratio less than 3 is considered a normal financial state and indicates that Orchid will easily and quickly decrease its debt.
New CEO Jeffrey S. Schoen assured analysts on the Q4 2013 conference call in February the upgrades “will not negatively impact our ability to continue the dividend at its current rate.”
Caveats with Orchid Paper Products are that it trades only slightly more than 50,000 shares per day and is lightly covered by analysts. It is also trading near 52-week highs.
Nutrisystem, the U.S. weight management company, is in the “fourth inning of its turnaround,” according to CEO Dawn Zier. The company reported fourth quarter earnings on February 27, which disappointed on 2014 first quarter guidance, sending the stock down sharply. However, it did trim a bloated trailing P/E pre-earnings in the 300s to 58.52, and its forward earnings multiple is now a svelte 20.06. With the share price plunge, Nutrisystem now yields 4.80%.
The company has several other competitors in the weight management industry from Weight Watchers International Inc. (NYSE: WTW) to Medifast Inc (NYSE: MED) as well as online diet systems. However, this year, Nutrisystem is pioneering an algorithm-based meal program based on metabolism and tweaking its food offerings with flavors requested by its customers.
Finally, Silicon Motion Technology offers a yield of 3.60%, most unusual for a small cap technology company. More unusual, it has a reasonable valuation at a 20.54 trailing earnings multiple.
This Taiwan-based company primarily manufactures fabless semiconductors for multimedia consumer electronics products. Fabless semiconductors are designed and sold in-house but fabrication is outsourced to a semiconductor foundry, typically located in China due to its low labor costs. By outsourcing the fabrication process to a country like China, Silicon Motion Technology is able to concentrate its resources on research and development.
Recently, Silicon Motion Technology announced a big win – being included in the 2014 Samsung phone portfolio. It also offered upbeat guidance on its Q4 2013 earnings in January, sending the stock soaring 16%. During its quarterly conference call with analysts in January, the company’s executives made it clear that the upshot was the company is a leading provider of controllers and transceivers that sports a growing global market share. The company is guiding for full-year revenue growth between 5% and 15%.
Speculative but Worth a Look
Small caps are usually speculative and volatile but often outperform their bigger brethren. But small caps with big yields are rare, so consider these names a starting point for further due diligence.
View original at: Investment U
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