Happy Thanksgiving everyone: I'll see you on Monday.
The Money Madam
Tuesday, November 26, 2013
Wednesday, November 20, 2013
Income
investors look at many factors as they build their portfolios. I encourage a disciplined, systematic
approach. As you know I use four
criteria to screen for stocks to buy for income.
Periodically,
I evaluate my results and today’s post evaluates a microcap stock that I
profiled in 2011 as a dividend machine.
Does Market
Capitalization Matter?
This
questions comes up all the time. You
will find expert investors who encourage small capitalization stocks at various
times. They will tell you these stocks do better than the big boys.
What
is a small cap stock? What is a microcap
stock? Investopedia defines small cap. stocks as
those with a market capitalization of between $300 million and $2 billion. Microcap
stocks are less than $300 million. By
the way, to determine a stocks’ capitalization multiply the number of outstanding shares by the share price.
Perils &
Advantages of Microcap Stocks:
The
factors that affect small companies include the fact that they tend to be
thinly traded; they do not get attention from big Wall Street Investors; their
revenues and sales may be linked to very few customers.
These
factors suggest that if you really need to sell a company that is thinly traded
you may not get the price you need.
Because big investors like mutual funds have limits on how much an individual stock
they are allowed to own, you do not get the advantage of the price increases
related to mutual fund activity. The
loss of just one customer can ruin a small company.
However,
history shows that smaller cap companies have better growth rates year over
year: Ibbotson reports small caps
increase by 12% versus 10% for the big boys.
Moreover, these companies can operate under the radar and you can get a
disconnect between stock price and company fundamentals providing an investment
opportunity.
Microcap
stocks tend to be associated with the phrase “penny stocks.” Traded on the Bulletin Board or Pink Sheets,
these stocks are usually stocks for trading.
I do not buy these stocks. The
only small or microcap stocks I buy are those that provide income.
The
stock I am going to write about today is a microcap that has excellent
fundamentals and an excellent history.
Espey Manufacturing
& Electronics (ESP)
This
company is a dividend machine. It has
been in business since 1928. They are an
original equipment manufacturer of very precise components for military and
severe environmental applications. The market capitalization is a mere $77
million.
ESP dividend machine
fundamentals
ESP’s
stock price history is interesting. If
you go back to before the financial crisis of 2009, ESP traded around $18. The price suffered during the crises and
retreated to $13.31 in March of 2009.
Since then, the stock price has clawed its way back to more than double
to close at $33.08 on November 19, 2013.
When I profiled this stock in 2011 the price was $26.00 per share.
ESP Dividend History
The
reason I have invested in ESP and included ESP in the 2011 dividend machine
portfolio, is the dividend. This
company lives to pay its investors.
Every year since 2008 the company pays a quarter dividend that is
increased annually and pays a special extra dividend.
2013
is no exception. ESP just declared
another $1.00 special dividend to be paid on Dec. 19, 2013 to owners of record
on Dec. 12, 2013.
Conclusion:
This
is a well managed company. ESP has a
proven history. It is financially solid
and has delivered excellent price increases.
Although it is a microcap stock, you should consider it for the income
producing portion of your investment portfolio.
The Money Madam
Related articles
Wednesday, November 13, 2013
Seeking
Alpha published a terrific article that provided an extensive review of
dividend champions at sound valuations.
The article is very thorough and I read it with interest. I always like to compare my dividend machine
strategy with other professionals. My
post looks at the four companies these two strategies have in common. Here
is the link to the Seeking Alpha article.
Difference between
Dividend champions and Dividend Machines
Dividend
champions have increased the dividend for 25 years. My dividend machines have increased the
dividend for more than 5 years (7 years in 2013.)
Dividend
machines have to pay at least three percent and in 2013 we want closer to four
percent. Dividend champions do not have
to meet that hurdle.
Four Stocks common to
both strategies: KMB, MCD, SYY, CVX
Of
the many stocks profiled in the Seeking Alpha article, I found four that meet
the four criteria I use to call a stock a dividend machine. Incidentally, the author, Chuck Carnevale
states he is long all four of these stocks.
I
have been trying to make sense of my historical data on these four stocks and
Mr. Carnevale nailed it. Of the four stocks we both agree that KMB is pricey,
MCD and SYY fully valued, and CVX a potential buy.
Let’s
look at each company’s dividend machine fundamentals; the data are presented in
the tables below. I have grouped
McDonald’s (MCD) and Sysco (SYY) together as they are considered fairly valued;
then Kimberly Clark (KMB) which is overpriced and Chevron (CVX) which seems to
be the best value.
Dividend Machine
Fundamentals of MCD & SYY
Kimberly
Clark (KMB), considered a bit pricey at the time I conceived this article,
broached the three percent dividend yield minimum today when it closed above
$108. I guess we were right; KMB’s
dividend machine fundamentals are presented below along with Chevron
(CVX.)
Dividend Machine
Fundamentals of KMB & CVX
My
take is that when you can acquire stocks like KMB and CVX with yields greater
than three percent do it because their dividend increase potential makes them
better investments for income investors than a slow growth four percent
yielding stock.
The Money Madam
Labels:
CVX,
Dividend Champions,
Dividend Machines,
dividend valuation,
KMB,
MCD,
Seeking Alpha,
SYY,
The Money Madam