Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

Small Cap Dividend Growers - 08 Mar 2015 21:43

Tags: bhb mhld micro_cap small_cap span tess weys

Without a doubt, the rock stars of dividend growth are large cap and mid-cap companies like Procter & Gamble, Johnson & Johnson, 3M, and Coca-Cola. It is for good reasons they get top billing and are investing darlings. They are well known names, with conservative financials, strong well positioned products and have been growing dividends for decades.

But large companies are not the only source for dividend growers. Small & micro-cap companies also have their growers and there are advantages and disadvantages of having them in your portfolio.

Advantages

  • Small company stocks typically are thinly traded and are not subjected to wild price swings during market corrections or run-ups, this is reflected in their low beta. This low beta can help add some stability to your portfolio during these times.
  • Small companies with strong management and conservative financials tend to operate and at times dominate their local market or niche service. In other words, they have a strong moat locally instead of nationally.
  • Conservatively run small companies typically do not have a strong future for massive equity returns in their stock price. Instead they focus more on how to return value to shareholders and it is not uncommon to see the “Special Dividends” issued every so often.

Disadvantages

  • Being small usually translates into a small customer base. Some companies may have 20 to 40% of earnings from a single customer. If that single customer leaves the effects would be devastating.
  • Some small businesses are tied to the local economy and not the national economy. While the rest of the economy may be booming your local might be collapsing. Detroit is an excellent example of a failing local economy in relation to a recovering national economy.
  • Their niche market may be seasonal or cyclical so you have stomach earning swings. Snow removal equipment is a good example.
  • If they are thinly traded and you have too large of a position you may not be able to effectively sell all of your shares in a single transaction.

My favorites

Due to the disadvantages identified above, I would not make small companies a significant percentage of my portfolio but I would allocate 10% to 15%. Is this the correct allocation amount? I am not sure as I will have to back test a model for the right % mix. But regardless, here are my 2015 favorites of which I personally own two (BHB & MHLD).

Bar Harbor Bank (BHB)

Dividend Yield 3.44%
5yr CAGR 5.5%
Yrs of Dividend Growth 12
Market Cap $194M
Beta 0.68

Bar Harbor is a local Maine bank with 15 branches, a well-managed balance sheet and has been around since 1887. They review dividend payouts quarterly and have had 15 straight quarters of dividend growth.

Besides a strong financial statement and dividend growth record, what I really appreciate, and see as their biggest strength, is the board of directors. All of the directors are local business (or former) owners. The businesses they represent are varied from Real Estate, to Funeral Homes, to Car Dealerships. Essentially the board members have such connections with the local community and economy that they understand the pulse of Maine's economy and as such make decisions to guide the bank to consistent profitability.

Maiden Holdings (MHLD)

Dividend Yield 3.7%
5yr CAGR 14.96%
Yrs of Dividend Growth 7
Market Cap $1.03BM
Beta 0.84

MHLD is an insurance company based in Bermuda that provides reinsurance solutions to regional and specialty insurers primarily in the United States and Europe. It operates in three segments: Diversified Reinsurance, AmTrust Quota Share Reinsurance, and ACAC Quota Share.

What I really like about this company is their continued focus on growing earnings and being extremely shareholder friendly. MHLD is a re-insurer and what usually makes me nervous with insurance companies is their ability to execute risk management and how or where they keep their investments.

MHLD has been implementing a strategy to exit high risk segments and entering predictable and stable operating segments. This strategy has paid off over the last three years as we have seen earning grow from $0.39 per share in 2011 to $1.53 per share in 2014.

In regards to investments, it is fairly common for insurance companies to invest in fixed income and MHLD is no different. The concern here is when interest rates rise bond prices will fall creating a potential loss. Fortunately, for MHLD, most of their fixed income bonds have a maturity of less than 10 years and only 2.2% of their bonds have a maturity greater than 10 years so if rates do rise losses will be minimal.

Span-America Medical Systems (SPAN)

Dividend Yield 3.16%
5yr CAGR 9.4%
Yrs of Dividend Growth 16
Market Cap $56M
Beta 0.02

Span-America Medical Systems manufactures and distributes various therapeutic support surfaces and related products for the medical, consumer, and industrial markets. It operates through two segments, Medical and Custom Products.

SPAN is nice entry into the healthcare field as its products can be found in hospitals, nursing homes, rehabilitation centers, convalescence homes, medical centers and specialized bedding for homes.

But the biggest drawback for SPAN is its size. With a market cap of $56M and just under 3M outstanding shares this is as far as you can get from a highly traded stock with an average daily trade volume of only 5600.

Tessco Technologies (TESS)

Dividend Yield 3.67%
5yr CAGR 43.1%
Yrs of Dividend Growth 6
Market Cap $178M
Beta 0.54

Tessco Technologies architects and delivers products and value chain solutions to organizations for building, operating, and maintaining wireless broadband systems.

Tessco is currently a mild turnaround story. TESS was a victim of having a large percentage of revenue coming from one customer and in this case AT&T. When AT&T parted ways with TESS revenue dropped from $752M in 2013 to $560M in 2014 or a 25% decrease. Investors took this news negatively and sent the stock plummeting from its high of $41.77 per share to its current price of just $21.78.

Unfortunately, investors took the AT&T loss and didn't look closer at the numbers. Business with AT&T had incredibly slim margins and consumed too many of Tessco’s assets. By parting ways, Tessco was able to redeploy its assets chasing higher margin business and focusing on a more profitable strategy that should start seeing results in late 2015.

With $11M cash on hand and only $2M in long term debt this should be the bottom of Tessco’s earning woes as they start moving forward. Additionally with a payout ratio of 57% and projected earnings growth of 30% the dividend looks fairly safe and can continue growth based on earnings growth.

Weyco Group (WEYS)

Dividend Yield 2.68%
5yr CAGR 5.3%
Yrs of Dividend Growth 33
Market Cap $305M
Beta 0.61

Weyco Group, together with its subsidiaries, is engaged in the distribution and retail of footwear. It operates in two segments, North American Wholesale and North American Retail. The company designs and markets footwear for men, women, and children under the Florsheim, Nunn Bush, Stacy Adams, BOGS, Rafters, and Umi brand names.

In short there is nothing exciting about Weyco’s business. They have conservative financials (including no long term debt) and specialize in shoes. These are not high fashion models or highly sought after new designer trends but simple and comfortable dress shoes, rain boots & sandals.

As long as there are special occasions, weddings and funerals Weyco will always be there to provide us with the footwear. Their brands are found at most retailers nationwide giving them a niche moat. - Comments: 0

Recent Buys - ESV, BHB & MHLD - 30 Apr 2014 00:06

Tags: bhb esv mhld

Finding opportunities for new acquisitions that meet my growth requirements is getting tougher but with a little elbow grease there are still opportunities.
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My first purchase was to increase my position in the oil platform company Ensco (ESV). This was only a small purchase ($500) but could not resist the share price of $48.72 per share and a yield of 6.16%. Not sure why but Mr. Market has punished this stock the last 6 months so I'm capitalizing on the opportunity. This purchase adds $30 annually to my portfolio.
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logo_BHB.png

Second purchase was Bar Harbor Bank (BHB) at $37.42 a share and yield of 3.5%. Bar Harbor is a local Maine bank with 15 branches, a well managed balance sheet and has been around since 1887. They have a dividend growth history of 10 years with a 5% average rate. Adding a twist to this purchase is a recently announced 3 for 2 stock split scheduled in May and an 3% dividend increase slated for a June payout. Another feature that makes this an attractive purchase is that they review dividend payouts quarterly and have had 12 straight quarters of dividend growth. The one down side is the size of the company with a market cap of only $157M. With a small cap it is hard to get the attention of wall street investors so equity growth will be limited but on the positive side it translates into a low beta. This purchase adds $56.70 annually to my portfolio.
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logo_MHLD.png

Third purchase was Maiden Holdings Ltd (MHLD) at $12.06 per share and yield of 3.65%. MHLD is an insurance company based in Bermuda that provides reinsurance solutions to regional and specialty insurers primarily in the United States and Europe. It operates in three segments: Diversified Reinsurance, AmTrust Quota Share Reinsurance, and ACAC Quota Share. They have a 6 year dividend growth history and a 3 year 11% average dividend growth rate. This purchase adds $54 annually to my portfolio.
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BHB and MHLD were both on my watch list so I can scratch them off the list. Tough part is I have nothing to replace them with and the candidates on my watch list is getting smaller each quarter. - Comments: 0

Regional Banks have a place in my portfolio - 04 Jan 2014 21:04

Tags: banks bhb build_diversity efsi fmao lark nwfl sbsi

Bank of the Ozarks (OZRK) is officially the first company of 2014 to announce a dividend increase. OZRK is a local regional bank that declared a 4.8% increase in their annual dividend.

It is not surprising that the news did little to excite markets. Local or regional banks are thinly traded small cap stocks that barely register on Wall Street’s radar screen. Though listed on major exchanges they have low daily trading volumes and you never hear of anyone becoming a millionaire from gains in stock prices from these little financials.

There are positives to investing in small regional banks. Unlike their larger brethren they are not exposed to massive financial scandals or undermining of the economy. They exist as part of our community by providing financial services to you and most of your neighbors. They sponsor little league teams or help with the Women’s Auxiliary Club. They have personal relationships with other businesses in the community helping them grow their businesses. And many have been serving their communities for more than 100 years.

So if stock price gains are slow why invest? Surely there are better investments. But, if you are a dividend growth investor these can be little gems of steadiness in your portfolio. Many pay dividends and even grow their dividends year to year. Most likely not the fastest dividend growth rate in your portfolio but when you factor in their low stock price volatility they act similar to utilities and provide some steadiness during market down times.

David Fish’s “Dividend Champions List” from http://dripinvesting.org/ provides a list of all stocks that have continually grown their annual dividend payouts for 5 years or more in a row. Of the 482 listings 50 are represented by banks. Of the 50 bank listings 45 are small cap regionals. And to break it down even further 18 of those companies have a dividend yield greater than 3%.

From that list I chose 6 nice little gems:

Company Symbol Yrs of Div Growth 12/31 Price Div Yield TTM P/E Beta Location Mkt Cap
Landmark Bancorp Inc. LARK 12 19.60 3.69% 10.54 0.05 Kansas 61.18M
Eagle Financial Services EFSI 27 22.50 3.38% 11.08 0.19 Virginia 77.38M
Norwood Financial NWFL 16 26.90 4.46% 12.12 0.05 Pennsylvania 98.84M
Farmers and Merchants Bancorp FMAO 9 22.06 3.81% 11.20 0.29 Ohio 106.44M
Bar Harbor Bankshares BHB 10 39.99 3.20% 12.38 0.44 Maine 157.48M
Southside Bancshares SBSI 19 27.34 3.07% 14.24 0.72 Texas 482.23M

The price chart below depicts the tight trading range over the last eight years and even the financial crash in 2009 had little effect on share value.

chartX.png

With the exception of LARK and SBSI, the dividend growth rate from year to year falls into a median range of a 5.5% increase year to year. Some years obviously were better than others but long term a 5% to 5.5% average growth rate is not too shabby.

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As stated earlier, regional banks with their low volatility in stock prices make these very similar to utility stocks but with an average dividend growth rate of 5%-5.5% a year makes it by far a better long term investment. I am of the opinion if you are looking to reduce risk within your portfolio through diversification then consider adding some regional banks and not limit yourself to utility stocks. In the long run your passive income stream will thank you. - Comments: 0


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