Sustainable Historical Dividends and Low Payout Small Caps (Part I)

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investors should be interested in companies that have a history of paying dividends. However, the history of paying dividends should go along with decent payout ratios and reasonable prices. Thus, to combine all those criteria together, I created an income stock screener to find small cap businesses with the potential of sustainable dividends. In addition, those businesses should be valued cheaply in the market. The criteria are: (1) small cap businesses (market capitalization is less than $1 billion), (2) minimum of 10 years of paying dividends, (3) dividend yields are higher than 1%, (4) payout ratio is less than 30%, and (5) EV/EBITDA is lower than 10x. 

NACCO Industries (NYSE: NC) operates in different businesses including lift trucks, specialty retail, mining, and small appliances. One of its companies, NMHG is considered to be one of the global leaders in the lift truck industry. It is also the biggest revenue and profit source for NACCO. In 2011, NMHG generated around $2.54 billion in revenue and $110 million in operating profit. Its second largest business segment, Hamilton Beach Brands, the designer and distributor of small electric household appliances for restaurants, hotels and bars, generated $493 million in revenue and $33.8 million in operating profit. The third and fourth businesses are Kitchen Collection and Coal Mining operations, that has generated $221.2 million and $81.8 million in revenue for the company respectively.

In the last 10 years, NACCO has been paying consistent and increasing dividends. It has grown its dividends from $0.97 per share in 2002 to $2.12 per share in 2011. For the trailing twelve months, its payout ratio was only nearly 14%. In the same period, it has also generated positive, but fluctuating operating cash flow. Over the past 12 months, the operating cash flow was $183 million and the free cash flow was $122 million. Currently, NACCO is trading at $65.26 per share, with the total market capitalization of $547.81 million. The dividend yield is 2.9%, and the valuation is cheap, at only 4.2x P/E and 4x EV/EBITDA. Its larger peer, Stanley Black & Decker (NYSE: SWK) is also paying decent dividend yield of 2.4%. The whole company is worth $12.67 billion in the market. However, it is valued at a much higher valuation, of 22.2x P/E and 9.5x EV/EBITDA.

The Andersons (NASDAQ: ANDE) is also a company with several diversified businesses including grain, rail, ethanol, turf & specialty and retail. The biggest revenue contribution is Grain business, of nearly $2.85 billion, accounting for more than 62% of total $4.57 billion in revenue. The second and third biggest revenue sources were Plant Nutrients, with $690 million in revenue and Ethanol, with $641.5 million in revenue in 2011. In the last 10 years, Andersons also paid increasing dividends, from $0.13 per share in 2002 to $0.48 per share in 2011. Trailing twelve months, the payout ratio was as low as 13%. Andersons is trading at $43.19 per share, with the total market capitalization of $803.33 million. The current dividend yield is 1.4%. The market is valuing Andersons at only 9.3x trailing P/E and 8.33x EV/EBITDA.

Foolish Takeaways

Companies with historical consistent dividend payments and conservative payout ratios are decent bets for income investors over a long period of time. Both NACCO and Andersons own those characteristics. In addition, the low EBITDA multiples seem to be attractive for investors to get in at the current price. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!



blog comments powered by Disqus