Small-Caps with Dividend 'Upside'

12/19/2013 8:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

We are always on the lookout for small- and mid-cap dividend payers, and we view a history of dividend growth as a favorable indicator, explains Richard Moroney; here, he highlights three stocks on the buy list of Upside, which offer dividend-growth prospects.

Aceto (ACET) announced a 9% increase in its per-share dividend in August, the first increase since it switched to a quarterly payout schedule in 2012.

At $0.24 per share, the new annual dividend represents less than 26% of trailing 12-month earnings, so continued dividend growth is likely if Aceto can maintain its operating momentum.

For the September quarter, the maker of pharmaceutical and chemical products reported a 122% increase in per-share earnings on nearly 16% growth in sales. Aceto, reasonably valued at less than 17 times the two-analyst consensus profit estimate of $1.20 per share for the year ending June, is a Best Buy. The stock yields 1.2%.

When HanesBrands (HBI) initiated a quarterly dividend in April, the underwear maker said the move reflected its debt-reduction progress, cash-flow growth, and margin-improvement prospects.

The October acquisition of Maidenform Brands for $583 million means the bulk of free cash flow is likely slated for debt reduction.

But the annual payout represents less than 21% of expected 2013 per-share earnings, and the Maidenform deal has the potential to drive margins substantially higher over the next two to three years.

HanesBrands, yielding 1.1% and trading at a reasonable 15 times expected 2014 earnings, is a Best Buy.

Penske Automotive (PAG) announced a 6.3% increase in its quarterly dividend on October 23, saying the move reflected its confidence in the “strength of the auto retail marketplace.”

Six days later, the company reported a nearly 22% increase in per-share profits on a nearly 15% sales gain for the September quarter. While pricing and gross profit margins were roughly flat, operating profit margins improved as overhead costs were spread over a bigger sales base.

Consensus expectations, calling for 15% per-share-profit growth in 2014, seem reasonable. Penske, yielding 1.6% and trading at 14 times expected 2014 earnings, is a Buy.

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