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Tiny Market Caps, Big Dividends

by
November 4, 2012 6:18 pm
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Many investors are turned off by micro-caps, or those stocks with market values ranging from $50 million to $200 million, for a variety of reasons. There is the assumption, sometimes a valid one, that the companies behind these are not legitimate enterprises and the stocks are often prone to manipulation.

Add to that the fact that income investors, a fair amount of them at least, do not view small market value stocks as fertile ground for dividends and it is easy to see why so micro-caps are often viewed as trades not investments.

No, micro-caps are not the perfect asset class and these stocks are not suitable for ultra-conservative investors, but there is a good news side to the story. Those investors that are willing to take on a bit more risk can find the alluring combination of growth and solid dividends with select micro-cap names. The following names were screened for yields above five percent, positive sales growth over the past five years and positive return on investment.

Ark Restaurants (NASDAQ: ARKR)
Ark’s market value of just $54.4 million ensures no investors is going to confuse this stock with McDonald’s (NYSE: MCD), Yum Brands (NYSE: YUM) or any other large-cap restaurant operator for that matter. The shares currently yield six percent, but the rub is that Ark’s payout today is lower than it was before the global financial crisis.

That yield compares quite favorably with companies that are viewed as Ark’s most direct rivals such as Dunkin’ Brands (NASDAQ: DNKN), Famous Dave’s (NASDAQ: DAVE) and Tim Horton’s (NYSE: THI). Combine the yield with consistently positive sales growth, and Ark is a name that some analysts have said does in fact hold some appeal to long-term, value minded investors. Ark’s exposure to casinos (it operates restaurants in several U.S. casinos), gives the stock leverage to improving consumer spending numbers, too.

PetMed Express (NASDAQ: PETS)
PetMed Express, the largest U.S. pet pharmacy, currently yields 5.4 percent. More importantly, the dividend has grown by 50 percent since the first payout three years ago. The company’s third-quarter results topped Wall Street expectations and savvy traders will like a short interest of 25 percent in the stock.

Should PetMed Express start climbing, those shorts will be forced to cover, fanning the flames a rally in the process. Perhaps the biggest risk with this stock is that Amazon (NASDAQ: AMZN) is expanding its footprint in the pet medications and supply business. Two scenarios are possible. Amazon could surpass PetMed Express and other companies, becoming the dominant pet pharmacy. Or Amazon could acquire one of these firms.

Intersections (NASDAQ: INTX)
Not only does Intersections yield over eight percent, the company recently announced a special dividend of 50 cents per share. The provider of consumer and corporate identity risk management services relies heavily on subscriptions to its identity theft/credit monitoring services. Some of the largest financial services firms in the U.S. can be counted among Intersections’ clients.

Impressive for a company of this size is a balance sheet with $21 million in cash and just $3 million in debt. In other words, Intersections is an able generator of free cash.

The risk to the bull thesis here is easy to spot. Bank of America (NYSE: BAC) represents half of Intersections’ subscribers with Citigroup (NYSE: C) chipping in another 10 percent. That may not be the type of customer diversity investors are looking for.


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