Published July 29th, 2016 by Bob Ciura
There is no exact science as to what constitutes a small cap. The term ‘small cap’ is loosely defined, but it is generally viewed as a stock with a market capitalization under $2 billion.
‘Mid cap’ is also fairly loosely defined. It is generally viewed as a stock with market cap under $10 billion.
A good amount (but not all) of the stocks in the Sure Dividend database are large cap stocks. That’s because The 8 Rules of Dividend Investing only look at businesses with 25+ years of steady or rising dividends. Many of these businesses have realized tremendous success over a large period of time, and have grown to become large or mega cap stocks.
This article goes beyond the typical 25+ year stocks that are covered on Sure Dividend. It covers 2 mid-cap and 2 small-cap stocks with dividend yields over 4%.
These stocks come with more risk than typical high quality blue chip stocks, but they also offer compelling dividend yields and attractive valuation multiples – which are becoming increasingly rare in today’s ultra-low rate interest environment.
Big Dividend Small or Mid Cap#1: DineEquity
DineEquity (DIN) operates casual restaurants. It owns the Applebee’s and IHOP brands, and currently operates more than 3,700 restaurants across 20 countries. The company currently has a market cap of $1.5 billion, making it a small cap stock.
The casual restaurant space has been one of the primary beneficiaries of low gas prices in the U.S. over the past two years. As consumers have more disposable income due to lower prices at the pump, casual restaurants are seeing a pick-up in traffic.
Last year, DineEquity grew comparable sales – a key metric for restaurants that analyzes sales growth at locations open at least one year – by 4.5% at IHOP and 0.2% at Applebee’s.
These growth rates are impressive, given that many other stocks in the fast food and restaurant space are grappling with declining comparable sales. In addition, DineEquity is highly profitable—free cash flow rose 18% last year.
Another key factor behind DineEquity’s impressive growth is that it has aggressively accelerated refranchising activity over the past few years. DineEquity has rapidly embraced the franchise model, which is beneficial for the company because franchising is very lucrative and results in greater stability.
Franchising results in steady fees for the parent company while placing much of the maintenance and renovation expenses onto the franchisee.
These strategies have allowed DineEquity to come a long way since the Great Recession. After suspending its shareholder dividend payout in 2008 during the depths of the financial crisis, the company has steadily increased its dividends to the current level of $3.28 per share.
DineEquity currently offers a 4.5% dividend yield, which is more than double the S&P 500 average yield. The stock is also attractively valued at a price-to-earnings ratio of just 14.
Big Dividend Small or Mid Cap#2: Cedar Fair
With the Fourth of July in the rearview mirror and Labor Day up ahead, summer is officially in full swing. When the calendar turns to the dog days of summer, amusement parks are one of the major beneficiaries. Cedar Fair’s stock ticker is (FUN), and that is a very appropriate stock symbol.
The company operates 11 amusement parks, three outdoor water parks, an additional indoor water park, plus five hotels in North America. The company’s market cap is currently $3.4 billion.
As a major amusement park operator, Cedar Fair’s financial performance is reliant on a strong domestic economy and a healthy consumer. Fortunately, as the U.S. economy continues to grow at a modest pace, consumers are feeling better about their personal finances and are willing to spend more on fun experiences.
Cedar Fair is benefiting from these economic tailwinds, because today’s consumer – particularly when it comes to younger generations like Millenials – prefer to spend their disposable income on experiences rather than things. This has given a real boost to Cedar Fair, which reported its seventh consecutive year of record performance in 2015.
The company grew revenue by 4% year-to-date through the July 4 holiday weekend. This is a critical period for Cedar Fair, as it represents 40% of total revenue for the year.
Cedar Fair has enjoyed broad based success across its various businesses. The year-to-date growth has been the result of a combination of 3% growth in attendance, a 1% increase in average per-guest spending within the parks, as well as 7% growth in spending outside parks, such as at the resort hotels.
These results are a great indicator that 2016 will be another record year of measurable growth.
Cedar Fair is structured as a partnership, which is permissible since the bulk of its assets are land and real estate. As a result, the company has a different tax status that permits it to pass along the bulk of its cash flow to investors as a distribution.
This typically results in high yields for MLPs, and Cedar Fair is no exception. It currently pays a distribution of $3.30 per unit, which results in a very high 5.5% yield. This is more than twice the yield of the S&P 500 Index.
Big Dividend Small or Mid Cap#3: CF Industries
CF Industries (CF) is a major player in nitrogen fertilizer. The past year has been an extremely difficult one; CF stock has fallen from above $60 to its current level of $25. The company currently has a market cap of $6 billion.
The reason for the prolonged downturn is that global oversupply has put a significant dent into prices of ammonia and urea ammonium nitrate, or UAN. Another factor weighing on CF’s profits over the past year has been a major investment in new production facilities.
Because of these factors, sales fell 9% in 2015, while earnings collapsed by nearly half for the year. Unfortunately, CF has had an equally difficult time to start 2016, reporting a more than 50% drop in earnings per share last quarter.
CF’s core businesses, ammonia and granular urea, together make up more than 50% of total sales. Weakness in these areas is having a very negative effect on the company. Ammonia prices dropped by a third last quarter, and by a quarter for granular urea.
To be sure, the company is suffering currently. Long-term investors have a compelling entry point, however. While the current picture is bleak, there could be hope for a sustained turnaround..
CF operates in the agriculture industry, and future demand for food and improved crop yields is only likely to rise from here due to economic development in emerging economies and global population growth.
Prices of CF’s key products are currently depressed, but if global suppliers decided to cut production in an effort to raise prices, it could have a snap-back effect going forward.
In addition, another potential turnaround catalyst is that CF’s major Donaldsville UAN and ammonia plant expansion project is almost complete.
CF’s North America expansion projects cumulatively cost the company $4.6 billion since they began. This is why the company reported $1.2 billion of negative free cash flow in 2015.
Going forward, once this project is complete and begins production, it will stop using cash and start providing cash flow. This will significantly help CF’s cost structure.
As a result, CF could be an attractive turnaround stock. It is cheap, trading at a price-to-earnings ratio of just 12, and the stock pays a 4.5% dividend.
Big Dividend Small or Mid Cap #4: Escalade
Escalade (ESCA) is likely a company most investors have not heard of, but it has a strong business model and a long runway of future growth.
The company operates in the sporting goods industry. Escalade is a small business, with a market cap of just $153 million.
Escalade manufactures and sells sporting goods products in basketball goals, archery, indoor and outdoor game recreation, and fitness products. It has a huge portfolio of sports products that includes the Bear Archery brand; the STIGA, Ping-Pong, and Prince table tennis products; Goalrilla and Goaliath basketball goals, as well as Atomic and American Legend lines of hockey and soccer game tables.
Its fitness products include The STEP and USWeight brands. It also sells billiards products under the Mizerak and Minnesota Fats brands, and outdoor games under the Zume Games, Onix, Viva Sol, and Pickleball Now brands.
Last year, Escalade grew revenue by 13%, due to growth from acquisitions. Related acquisition costs caused net income to decline 2% in 2015, but much of this decline was due to unfavorable currency fluctuations resulting from the company’s international operations.
To be sure, Escalade does have a near-term risk, which is the bankruptcy of major sporting goods retailer Sports Authority. This caused first-quarter earnings to decline by nearly half—but this should not be a long-term issue. The sporting goods industry more broadly remains healthy.
In many ways, Escalade is a play on the consumer trends mentioned above. As consumers seek more active lifestyles, they are spending more disposable income on products that fulfill that desire. Escalade is a sneaky way to capitalize on the health-and-wellness trend in America, as many of its products compel consumers to get outside and be active.
These trends do not appear to be going away any time soon. For that reason, Escalade should be able to sustain its dividend over the long term, with the added benefit of a great deal of future growth potential.
Escalade is a bargain dividend stock based on its yield and price-to-earnings ratio. The stock trades for a price-to-earnings ratio of 15, and its $0.44 per share annual dividend provides a hefty 4.2% yield.