In for the Long Haul

Paying Big Dividends Continued…

A screen for small cap companies paying big dividends produced a list of 150 stocks. (See the post Paying Big Dividends, May 16, 2008.) If we had simply looked at the top dividend yields Fairpoint Communications, Inc. (FRP: NYSE) would be the top pick with a dividend yield of 18.2%. USA Mobility, Inc. (USMO: Nasdaq) followed in second place with a dividend yield of 12.3%.

However, as we pointed out in our previous post, investors looking for good dividends have to look closer than just the yield. While we passed over these two high yielding stocks because neither has a long-history of dividend payment and both are struggling with fundamental challenges, number three on the list met our criteria.

Nordic American Tanker Shipping Ltd. (NAT: NYSE) is trading at $41.00 and change, yielding 11.7% on an annual dividend of $4.72. Nordic is an international tanker company that operates twelve double-hulled crude oil tankers. Sales totaled $189.3 million in the trailing twelve months ending March 2008, providing net income of $44.8 million or $1.57.

What we like most about Nordic is its ability to generate cash. Last year Nordic converted 41.6% of sales to cash flow from operations. Its average over the last five years is 57.2% conversion.

Nordic also has a lengthy history of paying dividends - 43 consecutive quarters. That said, the dividend has varied year-to-year, with a peak payout of $5.85 in 2006.

As attractive as Nordic might seem from a dividend standpoint, we note that NAT is not a value compared to the shipping sector. NAT is trading at 25.7 times trailing earnings compared to 16.2 times for the shipping industry. The comparison is the same for cash flow multiples. NAT trades at 13.7 times and the group average is 10.2 times. However, the premium might be worth its since historically Nordic is more profitable than its peer group. Nordic’s five-year average net profit margin is 38.8% compared to 23.2% for the shipping group.

Analyst estimates are in Nordic’s favor from a valuation standpoint. NAT shares are now trading at 15.5 times forward earnings. According to Zacks Investment Research, the consensus EPS estimate for 2008 is $2.60. The range of the six contributions is $1.96 to $3.14, suggesting there is some dissension on Nordic’s prospects. Nonetheless, the stock is trading at a realistic forward PE of 21.3 times the lowest EPS estimate contribution.

Another of our criteria for selecting good dividend small-caps is beta - the measure of volality relative to the equity market. Investors who want dividends should look for high yields with stock price stability. The beta for NAT is approximately 1.16, suggesting investors can jump “in for the long haul” with Nordic at still get some sleep. An array of call and put options also provides a means to build or protect long positions in NAT.


Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Paying Big Dividends

The financial pundits have been making a big deal about dividends recently. Investors looking for some relief from volatility in the U.S. equity market might consider holding more cash. However, low interest rates and rising inflation make money market funds a risky proposition. Investing in dividend paying stocks makes sense as a hedge against inflation.

Focused as we are on the small cap sector, dividends typically do not figure prominently in our stock selection processes. However, we know dividends are not limited to the large- and mid-cap sectors. So we completed a search for small-cap companies paying big dividends.

It made sense to simply eliminate certain troubled industries, such as home builders, banking and finance. Another important factor is beta, a measure of how volatile the stock is compared to the general market.

Our initial screen returned 160 companies under a market cap of $1.5 billion. We chose those with dividend yields over 4.0% and beta measurements under 1.3. That exercise winnowed the group down to 20 companies.

It is not enough to simply look for the highest dividend yields. After all, the dividend yield could be high because a low stock price reflects problems with operations. We looked at the ability of the companies to generate cash - a signal of both healthy operations and ability to pay dividends. The measure we used was cash conversion - cash flow from operations divided by revenue. We compared the cash conversion ratio from the most recent twelve months to the same measure for the last five years combined. Next we looked at consistency in dividend payments.

Fourteen of the companies on our list had five-year cash conversion ratios higher then 20%. That means for every sales dollar that comes in the door, the company can put two dimes or more in the piggy bank for capital investments, acquisitions and dividends. Thirteen of the twenty companies have been paying dividends for five years or more.

We picked five stocks at the top of the list and will profile each in future posts. The industries represented include telecommunications, transportation and shipping, and one big surprise - publishing.