Investors are always looking for angles, tricks, or tips that will provide an edge. One such historical anomaly is stocks of smaller companies, which have, over periods of time, provided higher returns than their larger-cap counterparts. Of course, this added return comes at the price of additional volatility, but for aggressive investors a little more risk for more reward isn’t a bother.
Conservative investors, however, would likely take umbrage at such an idea. For these investors the additional risk simply isn’t worth the potential for higher returns. There are, however, many ways to slice and dice a category of stocks. For example, one could simply limit their universe to small caps that have low betas (a measure of volatility to a broader index). Although this alone would limit the investment options to stocks that are statistically less volatile than a broad index, it says nothing about the actual companies being considered.
To get a better grasp of a small company while still leaving plenty of room for variety, dividend yield is another good addition to the screening process. Dividends can’t be faked or taken back, so they are often viewed as providing insights into a company’s finances and management. Although nothing is universal, looking for small company stocks with low betas and relatively high dividends should create a good starting point for conservative investors seeking some small-cap exposure.
We created such a screen using Value Line’s online screener only to find that adding beta only shortened the list by a few names—suggesting that it didn’t add as much value as we had anticipated. As such, we altered the screen and simply looked for stocks with market caps between $100 million and $1 billion and dividend yields above 3.0%. The list was a little longer, but it was also more varied, allowing for the question, “Is an 8% dividend yield actually worth the risk of a stock that is slightly more volatile than the market?”
Subscribers can replicate this screen using Value Line’s online stock screener, with or without the addition of beta. Our non-beta version of this screen turned up high dividend yielding small caps like PDL BioPharma (PDLI), United Online (UNTD), and BGC Partners (BGCP), offering a collection of risk/reward combinations, as well as varying dividend yields.
PDL BioPharma, Inc.
PDL BioPharma, Inc. creates humanized antibodies and other proteins, which are used for prevention and treatment of various conditions, such as autoimmune disease, cancers, and viral infections. Most of the company’s humanized antibodies are covered by patents in the United States, Europe, and Japan. In addition, PDL receives royalties on eight antibodies marketed by other biotechnology and pharmaceutical companies, either on a tiered fee basis or on a fixed percentage of sales.
The company’s first-quarter earnings displayed a nice uptick from the previous year, with much of the gain attributable to an increase in sales by licensees of Herceptin, Lucentis, and Tysabri. We expect these and other patents to boost revenues at healthy rates considering they are used in the development of a number of new drugs. Too, PDL recently settled some outstanding lawsuits, which should lead to a substantial decrease in legal costs and contribute to the higher share-net we expect.
At the beginning of the year, the board of directors declared dividends of $0.15 per share per quarter. Although this yearly total of $0.60 is lower than the $1.00 in the previous year, the dividend yield remains in the double digits. PDL is committed to returning value to its shareholders and hopes to continue doing this by buying royalty-generating assets. If such are not available, the company will likely increase dividends and/or buy back shares. Furthermore, the stock does not bear high risk, as it is less volatile than the market.
United Online is a well diversified provider of consumer products and services over the Internet, catering to an online population consisting of over 60 million registered users. The FTD segment accounts for two-thirds of revenue by offering floral-related products and services under the FTD and Interflora brands. Both of these are supported by the famous Mercury Man logo. The Content and Media unit includes the company’s primary growth driver, Memory Lane, a website that provides nostalgia content like vintage magazines, newsreels, sports highlights, movie trailers, song samples, photos, and the largest collection of high school yearbooks online, for a monthly fee. The other Web business, MyPoints, generates ad fees by allowing users to earn points-based rewards for responding to email offers, completing surveys, and shopping online. Finally, the Communications unit provides dial-up Internet access through NetZero and Juno.
The company began 2011 on a weaker note than expected, reporting a 4% decrease in revenues and share earnings that only surpassed last year’s number by a penny. Although the FTD business posted an improvement in year-over-year sales, the increase was not enough to counteract the lagging Content & Media division, which is attempting to raise awareness of Memory Lane's 100 million pieces of content originating from 1940 to 1999. Also, the Communications segment continues to see its dial-up customers transition to broadband services.
Despite the shortfall in the first quarter, the equity continues to offer a dividend yield of 6.2%, as free cash flow from FTD is stable enough to cover the dividend payment, thereby reducing the overall risk. Furthermore, the company may experience Website growth as it enters into new markets, strengthening earnings, and maintaining dividends.
BGC Partners, Inc.
BGC Partners, Inc. is a global interdealer broker, with offices located in 24 cities worldwide, including New York, London, and Tokyo. It provides integrated voice and electronic execution to banks, brokerages, and investment banks for a broad range of wholesale financial products. These instruments include fixed-income securities, foreign exchange, equity and credit derivatives, and futures. The company also offers access to the most liquid global platforms, as it operates multiple real-time electronic marketplaces, including government bonds.
BGC’s situation appears to be on the upswing, as both the top and bottom lines are inching higher. Too, the company recently raised its quarterly dividend 21%, from $0.14 to $0.17, bringing its yield to roughly 8.5%. Management, on average, pays between 75% and 85% of distributable earnings to shareholders, and we expect dividends to continue increasing based on projected business growth. Interest rate derivative trading should gain additional speed, driven by the shift of short-term government borrowings into longer-dated Treasuries. Furthermore, higher-margined segments, such as fully electronic trading, are expanding to become a greater portion of the overall business.
The beneficial aspects of this equity, however, do come with a price. The stock’s price is unstable and the equity is more volatile than the market overall, adding a fair amount of risk. As such, risk-averse investors might be taken aback, despite the potential gains to be attained.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.