Tuesday, January 13, 2009

More Dividend Love

It is hard to argue with dividends when stock price appreciation seems to be a thing of the past. Depressed valuations have push up dividend yields to record levels.

Most investors associate dividends with behemoths like General Electric Corp. (GE: NYSE) rather than small caps. With a dividend yield of 7.8% GE share are a compelling play for any investor - even those accustomed to the heady returns of emerging and fast growth companies. Even if GE shares fail to rise in the coming months, a long position would be earning far more than any bank money market or CD.

The question is whether GE operations are stable or will more bad news lead to further declines in the stock price. The last few months have proven that even apparently strong price supports can be breached if investors perceive a breakdown in core fundamentals. Then again GE is trading near ten-year lows. It is possible that a “de-leveraged economy” will never warrant the multiples that took GE shares to its ten-year high over $58.00 per share or even the five-year high of over $41.00. However, with a basis in the mid-teens where the stock is now trading the dividend play may be worth the risk.

There are small cap dividend plays that promise some element of growth without the risks associated with entrenched but threatened business - such as GE’s credit operations - that make conglomerates a dicey proposition.

First up, Technitrol, Inc. (TNL: NYSE) offers a dividend yield of 12.4%. Technitrol is trading near its 52-week low and is valued at a price/earnings ratio of 3.5 times. Why the bargain? As a manufacturer, Technitrol is seen as a loser in the current economic downturn. Based in Pennsylvania, Technitrol produces precision-engineered electronic components and electrical contract products. In the twelve-months ending September 2008, Technitrol recorded $1.1 billion in sales and produced a small but respectable profit of 3.33%. Earnings decreased in 2008, but excluding one-time charges Technitrol has been consistently profitable. The company has been paying a dividend for four years.

Sovran Self Storage, Inc. (SSS: NYSE) is in the same “overlooked” and “out-of-favor” situation. The stock has come off its 52-week low set in the Fall 2008, but still offers a dividend yield of 9.7%. Sovran owns and operates sefl-storage properties in twenty-two states of the U.S. Net income has grown at a five-year compound annual rate of 13.2%. That growth appears to be slowing in 2009. Yet the flat growth in net income that is implied by the consensus estimate seems like a strong performance given the current economic challenges.

Biotech is rarely associated with dividends, but Biovail Corp. (BVF: NYSE) shares are yielding 13.9%. This stock has also rebounded from year lows, but still presents a compelling value with a forward price/earnings ratio of 8.8 times. Biovail specializes in drug-delivery technologies that improve the clinical effectiveness of medicines. Net income has not grown as fast as sales, but the company still produces a 23.2% net profit margin. With $226 million on its balance sheet Biovail should be in a position to invest in new technologies as well as maintain a dividend payout.

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

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