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Stock Screen: Highest Yielding Small Cap Stocks - October 3, 2011
Investors are always looking for angles, tricks, or tips that will provide an edge. One such historical anomaly is stocks of smaller companies, which have, over periods of time, provided higher returns than their larger-cap counterparts. Of course, this added return comes at the price of additional volatility, but for aggressive investors a little more risk for more reward isn’t a bother.
Conservative investors, however, would likely take umbrage at such an idea. For these investors the additional risk simply isn’t worth the potential for higher returns. There are, however, many ways to slice and dice a category of stocks. For example, one could simply limit their universe to small caps that have low betas (a measure of volatility to a broader index). Although this alone would limit the investment options to stocks that are statistically less volatile than a broad index, it says nothing about the actual companies being considered.
To get a better grasp of a small company while still leaving plenty of room for variety, dividend yield is another good addition to the screening process. Dividends can’t be faked or taken back, so they are often viewed as providing insights into a company’s finances and management. Although nothing is universal, looking for small company stocks with low betas and relatively high dividends should create a good starting point for conservative investors seeking some small cap exposure.
We created such a screen using Value Line’s online screener only to find that adding beta only shortened the list by a few names—suggesting that it didn’t add as much value as we had anticipated. As such, we altered the screen and simply looked for stocks with market caps between $100 million and $1 billion and dividend yields above 3%. The list was a little longer, but it was also more varied, allowing for the question, “Is an 8% dividend yield actually worth the risk of a stock that is slightly more volatile than the market?”
Subscribers can replicate this screen using Value Line’s online stock screener, with or without the addition of beta. Our non-beta version of this screen turned up high dividend yielding small caps like Macquarie Infrastructure Company (MIC), A. Schulman Inc. (SHLM), and Bob Evans Farms Inc. (BOBE), offering a collection of risk/reward combinations, as well as varying dividend yields.
Macquarie Infrastructure Company
Macquarie Infrastructure owns, operates, and invests in a diverse group of infrastructure businesses in the United States, including airport services, district energy, natural-gas distribution, and liquid-storage terminals. The manager, Macquarie Infrastructure Management, is paid a fee based primarily on MIC’s market cap. It can also earn a performance fee equal to 20% of the outperformance of a designated U.S. utilities index.
Macquarie Infrastructure has been posting solid results thus far in 2011. The airport-services segment continues to snap back from the recession, with rising volumes of general aviation traffic supporting low- to mid-single-digit gains in fuel volumes and gross profits in the second quarter. What’s more, at the company’s gas manufacturing and distribution unit, operating profits are on the rise, due to favorable economic trends in Hawaii, where those operations are based. The district energy segment, however, has been sluggish of late, though a hot summer in Chicago might have helped lift results during the September quarter.
Management hopes to increase the dividend payout sharply next year, but this is contingent on a favorable resolution of a dispute with its co-owner at the liquid storage terminals segment. Macquarie thinks the business should resume paying dividends to its owners, but the founding family doesn’t agree. (Each of the parties own a 50% share.) The matter is headed to arbitration early next year, and until it is settled the impressive 4.8% yield will continue to be funded entirely by the gas manufacturing and district energy segments.
A. Schulman sells high-performance plastic resins that are used as raw materials in its customers’ manufacturing operations. The company also purchases plastic resins for resale or to formulate proprietary compounds tailored to customer specifications. A. Schulman acts as a manufacturer, merchant, and distributor. Its current dividend yield is 3.6%.
We have lowered our fiscal 2011 (year ended August 31) share-earnings estimate for A. Schulman. Third-quarter share net was markedly below the year-earlier tally and our estimate. Sharply higher raw material costs curtailed the operating margin by nearly 200 basis points. Schulman has made it a top priority to try to more closely match selling price hikes with increased raw material costs. The dilemma is that customers are balking at the higher prices. That said, it expects to continue pursuing minor acquisitions. The company appears to have a solid pipeline of potential acquisitions to help boost its market position in more lucrative segments. We think its strong financials should enable it to consummate such purchases, as well as repurchase stock. Steady dividend hikes are also likely in the years ahead.
Bob Evans Farms
Bob Evans Farms operates 563 family-style Bob Evans Restaurants in the East, Midwest, and Southwest. It also operates 145 Mimi’s Cafe restaurants. It manufactures and distributes sausage and other food products under the Bob Evans Farms and Owens Farms names. The company owns all of its plants and most of its restaurants.
BOBE got off to a strong star in fiscal 2011, which began April 30th, thanks to strong results at the food products segment. Adjustments in pricing and promotional programs, along with cost savings from manufacturing productivity initiatives, lifted unit income from the prior-year period. However, challenges remain at the company’s two business divisions. The food products segment must still contend with inflationary pressures on hogs, a key commodity whose prices have yet to back off much from last year’s historically high levels.
Meantime, the restaurants continue to struggle with weak same-store sales. The company, however, has boosted its dividend by 25% and it’s now yielding 3.4%. It also is stepping up spending on capital projects, which had been modest in recent years. In 2011, the company plans to open six Bob Evans stores and roll out a store-remodeling program to more markets. Despite the higher capex, we still expect the company to keep its current dividend payment intact.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.