3 Small Caps That Are Big Players in The Dividend Field

Published Thu, 07 Jan 2016 16:00 CET by DividendYields.org

Investors select small-cap stocks because of their growth potential. A small company with the ability to grow into a massive corporation is more likely to offer early investors tremendous returns than an already established company that potentially faces debt or corporate restructuring issues. The stock market offers a wide array of small caps that are big players, often mispriced, but definitely a solid bet for dividend investors.
This article discusses three small caps that trade in different industries. Although all three companies strongly underperformed Nasdaq and NYSE on YoY basis, they consistently deliver strong results. These companies deliver high-yielding income payouts, well above their industry averages, suggesting solid dividend payments. If fact, such investments can offer exposure to oversized capital gain potential combined with good income payments, while eliminating the high margins of safety that blue chips require.

Archrock Partners, Brady and Capitala Finance YoY Stock Performance Graph
Archrock Partners, L.P. (Nasdaq: APLP) is a Houston-based company operating in the Natural Gas Distribution industry. Formerly known as Exterran Partners, L.P., Archrock Partners provides natural gas contract operations services to natural gas producers, transporters and storage providers across the U.S. The company’s services include the designing, sourcing, owning, installing, operating, repairing and maintaining equipment for natural gas compression services.

Q3 2015 Highlights: In the third quarter of 2015, Archrock has experienced a great number of stop activities, as, due to the unstable economic environment, many customers have decided to optimize production and lower their operating costs. In this context, the energy sector has faced a relative stability in earnings. Archrock’s revenues reached $163.29 million, up 6.6% YoY from $153.16 million, generating a gross profit margin of 60.9% from 59.6% in Q3 2014. On the downside, operating expenses climbed to $132.62 million from $119.22 million, an 11.2% YoY increase. This has generated an operating income of $30.68 million from $33.95 million, a decline of 9.6% YoY as well as to a net income of $11.50, down 36.5% YoY from $18.10 million in the same period last year.

Future Outlook: Archrock’s performance in Q3 2015 was stable in a difficult market, suggesting a solid basis for the coming quarters. Although the company has a relatively high debt-to-equity ratio (1.94), it doesn’t raise a red flag on its future earnings or ability to deliver a solid dividend to its shareholders. The company’s dividend growth for the period 2007-2015 is 106 %, while current dividend per share is $2.28, yielding 18.5% (average yield of oil and gas industry is 9.6%) at a payout ratio of 239% (average payout ratio of oil and gas industry is 51.3%). In addition, Archrock focuses on cost controlling strategies to achieve strong gross margins and seeks to meet long-term contracts that could lead to stable revenues. Average earnings growth for the next five years is estimated at 1.20% per year.

Brady Corp. (NYSE: BRC) is a Wisconsin-headquartered company operating in the Security Software & Services Industry. Brady specializes in the manufacturing and supply of identification solutions and workplace safety products to protect workplaces, products and people across the U.S. and internationally. Through its Identification Solutions and Workplace Safety segments, the company offers safety signs, labeling systems, spill control products, workplace safety and compliance products, among others.

Q1 2016 Results: In FY 2015, Brady has concluded its restructuring and is now driving efficient gains towards delivering shareholder value. Although the broader macroeconomic environment is relatively unstable, Brady has delivered strong Q1 2016 results. More specifically, although revenues were down 8.8% YoY to $283.1 million from $310.2 million due to foreign currency translation, gross profit margin was slightly increased to 49.2% from 48.4% in the same quarter last year. On the upside, operating expenses were down 10.7% YoY to $253 million from $283.2 million, generating an operating income of $30.1 million, up 11.6% YoY from $27 million and a net income of $18.7 million, up 37.7% YoY from $13.6 million in Q1 2015.

Dividend Strength: Brady is in business for the last 100 years, since 1914. The company consistently delivers dividend to its shareholders and its dividend growth from 2000 to 2015 is 12.5%. Current annualized dividend per share is $0.81, yielding 3.64% at a payout ratio of 506%.

Future Outlook: Brady is taking the right steps towards establishing sustained profitability. In spite of the challenges in the macroeconomic environment, the company changes its compensation plans to further motivate and reward its sales force to deliver revenue growth in the coming quarters. Current EPS of $0.16 is estimated to reach $1.33 on average through 2017, an 731% increase, while average earnings growth is estimated at 7.50% annually through 2020.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Archrock Partners LP 11.50 10.58 27.93 8.70% -58.83% 0.74 12.97 1.94 1.19 239%
Brady Corp 22.06 18.46 28.99 19.50% -23.90% 1.13 139.25 0.21 1.32 506%
Capitala Finance 12.57 11.75 19.12 6.98% -34.26% 0.20 17.86 0.82 269%

Capitala Finance (Nasdaq: CPTA) is a Charlotte-based investment company operating in the Financial Services industry. Capitala Finance provides financing to lower middle-market companies across the U.S. in a wide array of industries, including business services, energy services, healthcare, consumer products, food & restaurant and information technology, among others. The company provides equity investments, management buyouts, recapitalizations, subordinated debt and growth financing services and focuses on generating strong cash flows and margins.

Q3 2015 Highlights: Over the past few quarters, Capitala Finance has shifted its strategy towards capital gains aiming to cover dividend distribution with investment income. To meet this goal, the company has lowered its equity percentage to 16% of its total portfolio, thus generating additional capital gains that were used towards the payment of supplemental dividend.
Compared to the third quarter of 2014, Capitala’s Q3 2015 results are as follows:

  • Revenues climbed to $18.3 million, up 63.8% YoY from $11.2 million
  • Gross profit margin reached 47.9% from 39%
  • Operating expenses reached $10.5 million, up 38.1% YoY from $7.6 million
  • Operating income reached $7.8 million from $3.5 million, an 120.1% YoY increase
  • Net Income skyrocketed to $8.0 million from $0.3 million, an 2467.7% YoY increase
  • Current annualized dividend per share $1.88 yields 14.97% (average dividend yield of investment services industry is 4.18%) at a payout ratio of 269% (average payout ratio of investment services industry is 31.7%)
  • Debt-to-equity ratio, well below 2, at 0.82, suggests a financially healthy company

Future Outlook: Capitala has a solid pipeline of active deals, which are expected to generate more growth in the coming quarters. The company seeks for profitable opportunities that could sustain its growth strategy. Current EPS of $0.70 is estimated to reach $1.82 on average through 2017, an 160% increase, while average earnings growth is estimated at 11.1% annually through 2020.