Three Small Dividend Payers with Unique Business Models
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every industry has its own dynamics. Supply, demand, input costs, advertising, etc., the list goes on and on. Each company deals with these issues in their own way, some better than others. However, there are some companies that operate outside of the norm. They take a unique approach to their business and industry that competitors either haven't figured out is the better mouse trap, or simply can't pull off.
Not being able to use a particular business model, however, isn't necessarily a bad thing. It can just be a function of other company-specific factors, like size. For example, a giant food company like Kraft (NASDAQ: KRFT) can't pay as much attention to a small brand like relatively tiny B&G Foods (NYSE: BGS) can. The perfect example of this was the early 2007 Cream of Wheat transaction between these two food companies.
While owned by Kraft, Cream of Wheat was a dying brand. PepsiCo's Quaker Oats brand was easily eating Cream of Wheat's breakfast, to make a bad pun. However, after being sold to B&G, a much smaller company that has a history of taking on unloved brands, it has turned into a growth engine with new flavors driving sales of this old brand.
This is B&G's unique niche and a huge differentiating factor. Most impressive, management has proven that it can repeat the pattern: buy an unloved brand, give it a little TLC, and watch sales increase. Clearly that's a simplification, but you can't argue with success. Moreover, it gives investors a direct way to get in on brand turnarounds that isn't possible at larger entities, such as Kraft.
Another small company with a unique model is Whitestone REIT (NYSE: WSR). This real estate investment trust (REIT) owns shopping centers and office/mixed use properties that are predominantly in Texas and Arizona. Larger rivals like KIMCO Realty Corp. (NYSE: KIM) operate in the same segment of the REIT industry, but don't have the same market focus.
Indeed, with almost 1,000 shopping centers across the country, it would be hard for KIMCO to have the same market-level of expertise as Whitestone. This allows Whitestone to purchase properties that larger rivals might not even bother looking at. Like B&G, Whitestone takes these unloved properties and renovates them to increase their value and desirability.
However, another important part of Whitestone's model is what it calls focus on "Community Centered Properties." Basically, it tries to rehab and update its acquired sites with the local needs of the community in mind, often focusing on small businesses when leasing. Larger REITs usually trumpet their big brand name tenants, which can make leasing easier. But if you were a REIT with Circuit City as a tenant after that company went bankrupt, you quickly lost a huge chunk of your rent roll.
So having bigger tenants isn't always better, and Whitestone has done well keeping to the small end of the scale. Clearly, with around 40 properties located in just two markets, Whitestone can give its acquisitions and tenants plenty of attention. KIMCO, with nearly 1,000 properties spread across the country, simply can't provide that same focus.
Another REIT that has a similar market-specific focus is Washington Real Estate Investment Trust (NYSE: WRE). Washington REIT has been around for decades, and has always focused its efforts on the Washington D.C. region. It's had good times and bad, but it knows its broader market, and its sub-markets, intimately. For example, when cell phone towers were just becoming a revenue source for building owners, Washington REIT was offering up its rooftops as often as possible. This may seem like a small thing now, but when cell phone use was increasing dramatically, management's nimble response provided a quick boost to returns.
Another interesting aspect of Washington REIT's model is that it invests across multiple asset classes. While most large REITs specialize in one property type to keep operations simple and amplify economies of scale, such as KIMCO's focus on shopping centers, Washington REIT's market specificity allows it to spread its property exposure. This, in turn, allows management to focus on those assets that it believes will most benefit shareholders. So, if apartments are selling cheaply, it can step in. However, if apartment pricing is dear and office space is presenting a value, it can switch gears and buy office buildings.
Clearly, there are benefits to being large. However, there are also benefits to being small. It is often easier for investors to buy and keep track of large companies, but there can be material rewards for taking the extra time and effort to research smaller companies with unique business models.
ReubenGBrewer has a position in Washington REIT. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend PepsiCo. 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.If you have questions about this post or the Fool’s blog network, click here for information.