Introduction
Dividends add a tremendous amount of confidence when looking for small cap value companies. Small companies tend to fly under the radar and receive much less scrutiny compared to their larger counterparts. As a result, an investor needs to be extra careful when looking at these firms. A dividend helps reaffirm that the company is indeed flowing cash positively. A value investor can then have greater confidence waiting for the undervaluation to correct. Dividend payments also recompense the investor for his patience.
Screen Details
This screen looks for small cap stocks between $30 million and $2 Billion in market capitalization paying dividends. We require other filters to ensure attractive valuation. Some of the other parameters include:
- Dividend Yield > 2%
- Dividend 5 Year Avg > 1%
- EPS 5 Year Avg Growth > 8%
- Payout Ratio < 60%
- Price/Book < 1.2
- Price/Sales < 2
- Sales 5 Year Avg Growth > 3%
The Screen Results
Stock | Company | Dividend Yield | P/B Ratio | P/E ratio | P/S Ratio |
|---|---|---|---|---|---|
HNNA | Hennessy Advisors | 4.8% | 1.1 | 7.3 | 2.0 |
HOFT | Hooker Furniture | 2.6% | 1.0 | 9.1 | 0.4 |
UBOH | United Bancshares | 2.4% | 0.8 | 7.8 | 1.7 |
XIN | Xinyuan Real Estate | 10.8% | 0.3 | 1.4 | 0.1 |
Notes and Observations
- HNNA: Hennessy Advisors runs Hennessy Funds brand of mutual funds. The dividend payout is a comfortable 27% of the earnings. Sales and EPS growth in the short to medium term is slowing but the valuation reflects this. Longer term growth estimates look positive.
- HOFT: Dividend is well covered with a payout ratio of 23%. I am starting to like Hooker Furniture due to its nice valuation and great dividend. This stock is already on my further due diligence list.
- UBOH: Dividend is well covered at 20% payout ratio. Worth a look if you are looking at a financial stock. I will table this for later as the Fed interest rate environment is a little unsettled now.
- XIN: I do not believe I can confidently analyze Chinese companies at this time due to opaque markets and economic/trade uncertainities.
Ending Note
This is an instructive screen as we find very few candidates that fit our value + dividend criteria. These kind of low yield screens often turn up very profitable ideas, so they need to be pursued regularly. Question to ask when analyzing these stocks is, if the dividend yield is nice and the dividend is well covered, why is the stock being offered at such low valuations? Often the answer can be in a temporary cyclical trend. You can then make a judgement whether this is a good time to enter a position.
