These 3 Small-Cap Dividend Stocks Offer High Yields at Low Costs
From a tobacco exporter to a dental health wholesaler, these small-cap names can give investors outsized returns.
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Income investors often focus on the largest companies, as those with lengthy track records of dividend growth are usually the leaders within their industry.
Still, investors could consider expanding their search beyond the large-cap names and focus on the smaller caps, which have the potential for outsized returns.
These three small-cap stocks are high-quality dividend payers with market capitalizations below $2 billion and dividend yields above 3%.
1. Universal Corp. (UVV)
Universal Corporation UVV 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 Corporation was founded in 1886 and is headquartered in Richmond, Virginia. With 54 years of dividend increases, Universal Corporation is a Dividend King.
Universal Corporation reported its first quarter earnings results on August 7. The company generated revenues of $600 million during the quarter, which was 15% more than the revenues that Universal Corporation generated during the previous year’s period. Revenues were positively impacted by product mix changes, and growth was stronger than during the previous quarter. Universal’s gross margin was down slightly compared to the previous year’s period.
This headwind was more than offset by operating leverage tailwinds due to the revenue growth the company experienced. Universal’s adjusted earnings-per-share totaled $0.01 during the quarter, which was better than the small loss the company generated one year earlier. The company has not provided guidance for the current fiscal year, but comments indicate that demand is healthy.
As the leader in a declining industry, we do not expect the company to deliver strong business growth in the future. The company’s earnings-per-share could still rise over the next couple of years, however. Universal Corporation’s shares trade at a moderate valuation based on the earnings and cash flows that the company generates.
Universal Corporation also does not need to invest large amounts of money into its business, as the industry is not experiencing any meaningful growth. This gives Universal Corporation the ability to utilize a substantial amount of its free cash flows for share repurchases. Through a declining share count, Universal Corporation could be able to deliver some earnings-per share growth during the coming years.
In turn, this consistent EPS growth will fuel continued dividend increases. UVV stock currently yields 6.0%.
2. Patterson Companies (PDCO)
Patterson Companies, Inc. PDCO traces its history back to 1877 in the dental market. The company entered the animal health market with the 2001 purchase of Webster Veterinary. Patterson acquired Animal Health International, Inc. in 2015 and Miller Vet Holdings in 2021.
Today, the company is a large dental and animal health distributor and wholesaler selling dental and animal health products, equipment, devices, office management products and services. The dental segment operates in the U.S. and Canada, while the animal health segment operates in North America and the U.K. In FY 2024, total sales were $6.5 billion with about 62% coming from animal health and about 38% from dental.
Patterson reported Q1 FY 2025 on August 28, 2024. For the quarter, revenue declined 2.2% to $1.542 million from $1.578 million while diluted GAAP earnings per share declined to $0.15 from $0.32 on a year-over-year basis. On an adjusted basis, earnings per share decreased to $0.24 from $0.40.
Patterson is being affected by higher inflation and interest rates. However, the company has raised prices, managed costs, and introduced new products to counter negative trends. Patterson maintained guidance for adjusted earnings per share of $2.33 to $2.43 in FY 2025. We now believe that diluted earnings per share will increase on average about 2.0% annually out to FY 2030. We now forecast on average a 0.5% annual reduction in share count.
Patterson Companies is a major dental supply provider along with Henry Schein and Benco, who together control about 85% of the market. Patterson has about 30% of the market and this scale should theoretically provide a competitive advantage.
PDCO stock currently yields 4.8%.
3. Chesapeake Financial Shares (CPKF)
Chesapeake Financial CPKF is a one-bank holding company headquartered in Virginia. It was founded in 1900 and, despite its long operating history, has grown to only 16 locations, offering community banking and wealth management services. The company’s market capitalization is just $84 million, and it produces just over $60 million in annual revenue. The bank has $1.5 billion in total assets.
Chesapeake posted second quarter earnings on July 23, 2024, and results were about equal to what we saw a year ago. Earnings came to $3.037 million, which was equal to a year ago. Reported earnings-per-share came to 64.6 cents, which was off fractionally from 64.8 cents a year ago. Total assets came to $1.533 billion, up $62 million from year-end. Nonperforming assets were 0.237%, which was much better than 0.327% a year ago.
Chesapeake successfully navigated the Great Recession, but growth since earnings normalized has been fairly weak at about 5% annually. We are estimating growth of 5% annually as the expected base of earnings is now lower than before, as loan growth is picking up with Chesapeake taking advantage of higher lending rates, which should also bring margin improvements.
Chesapeake’s very low loan-to-deposit ratio could be a source of growth should the bank decide to take advantage of its much higher deposit base, with some of that being evident in year-to-date 2024 results. Credit quality is holding up nicely, but management is somewhat cautious.
Credit quality remains outstanding, and the bank said it is as good as it has ever been. We also see the dividend continuing to rise at a modest rate for the foreseeable future, keeping its streak of dividend increases alive and seeing the payout rise to 79 cents over the next five years.
Chesapeake’s payout ratio has always been very low, and we expect it will remain as such in the coming years. The good news is that the streak of dividend increases should be safe in just about any environment, since even an enormous decline in earnings should allow Chesapeake to continue boosting the payout by small increments. Chesapeake continues to boost the dividend in all kinds of macroeconomic environments.
CPKF has increased its dividend for 31 consecutive years and the stock currently yields 3.4%.
At the time of publication, Ciura had no positions in any securities mentioned.