Tuesday, May 20, 2008

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.

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