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3 Small Caps With Big Dividends

By Bob CiuraStock MarketsOct 09, 2020 12:37PM ET
3 Small Caps With Big Dividends
By Bob Ciura   |  Oct 09, 2020 12:37PM ET
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Investors looking for high-dividend yields will likely focus on large-cap stocks, and for good reason. The many blue-chip dividend stocks that populate the major indexes have high-dividend yields and, in some cases, long histories of dividend growth. But small-caps can be worthwhile dividend investments as well.

The Russell 2000 is the world’s most well-known index of small-cap stocks. Generally speaking, small caps have market capitalizations below $2 billion. Investors typically associate small-cap stocks with growth. And while this reputation is deserved, there are also small-caps that pay dividends to shareholders. Just because a company is a small cap does not necessarily mean it cannot distribute cash to investors in the form of hefty dividends.

These three small caps have market caps below $2 billion, meaning they could have impressive growth in their future. But they also reward shareholders in the near-term with above-average dividend yields.

Small Cap #1: John Wiley & Sons

John Wiley (NYSE:JWa) stock has a market cap of $1.8 billion. It is a publishing and research company whose operations are split into three segments: research, publishing and solutions. The company offers scientific, technical, medical and scholarly research journals, reference books, databases, clinical decision support tools, laboratory manuals, scientific and education books, and test preparation services. Its services also include learning, development and assessment services for businesses and professionals and online program management services for higher education institutions.

The company has performed relatively well to start the year. In the most recently reported fiscal quarter, revenue of $431 million increased 2% in constant-currency, compared with the same quarter last fiscal year. On an adjusted basis, earnings before interest, taxes, depreciation and amortization (EBITDA) increased 42%, while EPS increased 124% due to revenue growth as well as significant cost cuts. Among operating segments, research publishing and platforms revenue increased 6%, academic and professional learning declined 12% and education services grew 29%.

John Wiley & Sons’ focus on publishing research journals, scientific books and similar items gives the company a positive growth outlook. Book sales have declined in the U.S. for the past decade. But because John Wiley & Sons’ books and journals are for students, professionals and scientists (not for entertainment) the company enjoys a steady, recurring revenue stream. It has also successfully transformed itself, as ~75% of all revenues were generated from digital products during the last year.

John Wiley stock has a 4.3% dividend yield, and despite its small size, the company has increased its dividend for 27 consecutive years. This makes it an attractive combination of dividend yield and growth.

Small Cap #2: Universal Corporation

Universal Corporation (NYSE:UVV) is a tobacco manufacturer with a market cap of $1.1 billion. Universal Corporation is the world’s largest leaf tobacco exporter and importer. The company is the wholesale purchaser and processor of tobacco that operates between farms and the companies that manufacture cigarettes, pipe tobacco and cigars.

Universal has increased its dividend for 50 years in a row. Its impressive dividend history places it on the list of Dividend Kings, an exclusive group of 30 stocks with at least 50 years of annual dividend increases. Universal is not a high-growth stock. Instead, the bulk of shareholder returns comes from a high dividend.

Universal does not generate high revenue and earnings growth, but it does generate a high level of profits thanks to a strong business model. As a tobacco manufacturer, it does not need to invest large amounts of capital in growth, while taking full advantage of economies of scale. This allows the company to generate a bit of revenue growth, with margin expansion helping to generate earnings growth.

Last fiscal year, the company generated adjusted earnings-per-share of $3.49, which allowed it to raise its dividend for the 50th consecutive year. The current annual dividend payout of $3.08 per share is sufficiently covered by underlying earnings.

Tobacco is not a growth industry, which explains why Universal has made multiple acquisitions in recent years, to diversify its business model. In 2019, the company acquired FruitSmart, an independent specialty fruit and vegetable ingredient processor. More recently, in September 2020 Universal announced it will acquire Silva International, a privately-held processor of natural and specialty dehydrated fruits, vegetables, and herbs. This $170-million purchase will further add to Universal’s diversification efforts.

Similar moves like these will help Universal diversify its revenue streams and enhance the sustainability of the company’s dividend. Universal yields 7%, and along with the Silva International acquisition news, the company reiterated its commitment to increasing the dividend each year.

Small Cap #3: Navient Corp.

Navient Corp (NASDAQ:NAVI) has a market cap of $1.8 billion. Navient Corporation is a student loan management and business processing company. It also provides business processing solutions to health care and government clients. The company’s loan portfolio consisted of $61 billion of federally-guaranteed education loans, and $21 billion of private education loans, as of the 2020 second quarter.

Our fundamental analysis shows Navient has navigated the difficult economy relatively well. In the second quarter, revenues of $300 million increased 1.4% compared to the previous year’s quarter. Navient’s revenues easily beat the analyst consensus by $28 million. Earnings-per-share of $0.92 also beat analyst estimates, by $0.50 per share.

Looking ahead, Navient now expects full-year earnings-per-share of $2.95 to $3.00, meaning 2020 will likely be another year of earnings growth, despite the coronavirus pandemic and economic downturn. It appears defaults are not a major problem for Navient, a critical consideration for investors. In the most recent quarter, Navient had a delinquency rate of 8.2% in its Federal Education Loans segment, and 2% in Private Education loans. These delinquency rates represented a decline from the previous quarter, an indication that the worst is behind Navient.

Navient currently pays a quarterly dividend of $0.16 per share, which represents an annual yield of 7% based on the current share price. This is a very attractive yield, as the S&P 500 Index on average, yields less than 2% right now. Importantly, Navient’s dividend appears secure. At the midpoint of management EPS guidance, the company has a 2020 dividend payout ratio of approximately 22%. This indicates a highly secure dividend payout.

3 Small Caps With Big Dividends

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3 Small Caps With Big Dividends

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Comments (1)
Camaro Camero
Camaro Oct 11, 2020 4:48AM ET
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Really cute recommending UVV 1 day after the ex-dividend date instead of 1 day before!
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