5 unloved small cap stocks have strong dividends

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Stock B ends the same period at $10 for no gain but paid out $2 in dividends over this span.
A stock that’s both incredibly cheap and will pay handsomely while you wait for this value to come to fruition?
Their interest tends to set set a floor price on such stocks that prevents them from becoming attractive to growth-oriented buyers.
That being said, as a student of fundamental analysis specializing in uncovering deeply undervalued stocks, I sometimes come across stocks with high yields and good growth prospects.
Most of the time, I only care about their price appreciation potential and view any dividends as gravy.
For these stocks, the recurring cash income from dividends adds real and meaningful value that significantly augments the substantial upside these unloved stocks already offer from a capital-appreciation standpoint.
As a result, ACCO was also able to reduce its debt by $88 million in 2023 while continuing to fund its growth initiatives and dividends.
In 2023, the company had revenues of $9.7 billion and its market capitalization currently sits at around $650 million.

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You can have your cake and eat it, too, on occasion. These stocks have substantial dividends and are also well-positioned to generate significant capital gains.

By Forbes staff member Taesik Yoon.

When I was younger, I avoided stocks that paid dividends. I saw them as the possessions of people who already possessed enormous wealth, which your father purchased. Stated differently, these were the purchases you made after you had achieved wealth, not the investments you made to get there.

That aligns with some of the main factors that attract a wide range of investors to dividend-paying companies:.

a steady and consistent flow of passively earned income in the form of cash.

the idea that companies that pay dividends typically have a track record of reliable free cash flow and prudent debt management, which also reduces their perceived risk and makes them particularly appealing during market downturns.

Reinvesting dividends immediately enables you to take advantage of compounding, one of the most significant wealth-generating ideas in finance.

Now that I’ve had the good fortune to accumulate some wealth over the years, I understand the appeal. But more than anything, these years have shown me that it doesn’t matter how you make progress. In the end, money is money.

Allow me to explain with an obscenely basic example. Assume that the two stocks you bought, as indicated in the table below, cost $10 apiece. Over the course of a year, Stock A gains $2, rising to $12. During the same period, Stock B ends at $10 with no gain, but it has paid out $2 in dividends. In any case, you will receive the same total return of 20 percent.

This makes complete sense, of course. Money is a symbol of material worth. Thus, the value of the business and its shares should drop by the same amount when part of it is distributed as dividends to shareholders. However, a company that does not pay dividends will not experience this ongoing loss of real value in its stock and will instead see a faster accumulation of cash that can be reinvested to spur growth.

All of that implies that one must come at the cost of the other, and in reality, this seems to be the case quite frequently. Generous dividend payers typically function in established industries and markets with restricted room for expansion. To be honest, it’s not unreasonable to argue that some companies just have no other choice than to return their excess cash to their shareholders. Therefore, even though there is still a chance for capital appreciation, purchasing these stocks is primarily driven by the consistent and reliable income stream they offer. In contrast, a smaller company with more promising growth prospects would likely do better by reinvesting its excess cash to boost earnings and sales, which should raise the price of the stock.

Even so, it happens occasionally that a stock can provide both. These circumstances, in my experience, typically occur when a consistent dividend-payer that was already trading below market value experiences an abrupt decline in share value due to exaggerated operational worries resulting from a softening of its near-term prospects or in the state of the overall economy. Assuming the payout remains constant, this not only makes an already inexpensive stock even more affordable, but it also yields a higher dividend yield. More importantly, it may cause a stock to become noticeably oversold, look extremely attractive from a capital gains perspective, and have a dividend yield that is now high enough to draw in income-seeking investors.

To make such stocks really stand out, however, two more elements are typically needed. In order for dividend payments to be safe and even increase in the future, there must first be enough evidence. Secondly, there must be proof that the stocks of these companies will be able to gain significant value in the near future.

It seems too good to be true—a stock that is extraordinarily cheap and will yield a healthy dividend while you wait for this value to accumulate. That’s the reason they’re so elusive. The truth is that income-hungry investors don’t typically overlook reliable dividend payers. Their interest often sets a floor price for these stocks, keeping growth-oriented buyers from finding them appealing.

Having said that, I occasionally come across stocks with high yields and promising growth prospects as a fundamental analysis student who specializes in finding immensely discounted stocks. For the most part, I consider any dividends to be gravy and am primarily concerned with their potential for price appreciation. However, some yields are too generous to ignore. The recurrent cash income from dividends adds genuine and significant value to these stocks, greatly enhancing the substantial capital appreciation upside that these underappreciated stocks already provide.

Consider Fresh Del Monte Produce (FDP), the first of the five stocks of this type that are highlighted below and a name that most people who have been to a grocery store should be familiar with. This one has decreased by roughly 16 percent in the last year, whereas the SandP 500 has increased by 26 percent despite higher earnings in 2023 and predicted growth this year. Consequently, it is currently trading at less than 11 times its projected 2024 consensus earnings estimate, down from over 13 times a year ago. During this time, the company’s financial situation significantly improved, giving it the confidence to increase its quarterly dividend payment by 25% to 25 cents per share in February. Therefore, from slightly over 2 percent a year ago to nearly double that amount now, the stock’s yield has increased.

FDP stands for Fresh Del Monte Produce.

What Kind of People They Are.

In addition to being a rising supplier of value-added goods like prepared fruit and vegetables, juices, beverages, and snacks, Fresh Del Monte Produce is a global leader in the production, distribution, and marketing of fresh and fresh-cut fruits and vegetables. The company is known for producing fresh produce that is of superior quality and includes a range of fruits and vegetables such as bananas, pineapples, melons, tomatoes, avocados, grapes, and berries. Its vertically integrated business model facilitates quality control. FDP, a Florida company with its headquarters in Coral Gables, had $4 point 3 billion in sales the previous year and is currently valued at $1 point 2 billion. It provides services to clients in the Middle East, Africa, Asia, Europe, and North America, including foodservice operators, wholesalers, and retail stores.

Reasons For The Stock To Soar.

FDP finished 2023 on a negative note as adjusted earnings and sales in the last quarter fell short of the respective consensus estimates by $6 cents per share and $25 point 3 million, respectively. FDP’s operating results were below expectations for the second consecutive quarter. Following the first miss, its stock saw the largest one-day decline in the previous two years, plunging $3.52 on November 1, 2023, and closing the day at just $21.41, the lowest level in three years. Therefore, some may see the subsequent selloff in FDP’s stock as appropriate given the continuation and even worsening of the softer market conditions that emerged midway through last year, as implied by its fourth-quarter results reported in February.

It would be incorrect, though, to discount the significant operational advancements the business made in 2023, which should help this year’s performance. The company’s improved financial position from the previous year best illustrates this. In particular, FDP achieved notable progress in its asset optimization program, which aims to increase profitability through the sale and consolidation of non-strategic assets and idle manufacturing capacity, as well as other profit-boosting initiatives. Together, these assets produced $119.9 million in cash proceeds. They included two distribution centers and related assets in Saudi Arabia, an idle production facility in North America, a plastics subsidiary in South America, idle assets in South and Central America, and two carrier vessels.

At the same time, the year’s total earnings increased by 8% compared to 2022, and the effective management of working capital, combined with these factors, resulted in $120.3 million in free cash flow. That was the company’s highest yearly total in seven years and a significant improvement over $13.7 million in 2022. All things considered, this substantial infusion of capital made it possible for FDP to lower its net debt to just $373,7 million in 2023, a decrease of $157,5 million. This was the company’s lowest debt balance at year’s end since 2017.

I believe that the current price does not adequately represent the company’s strong gross margin of 8 points 2 percent on an adjusted basis for the year, which is the highest since 2016. This was made possible by the advantages of strict cost controls, a stronger focus on profitable growth (even at the cost of losing some low-margin business), and the asset optimization transactions mentioned above. This should get even better in 2024, in my opinion, as FDP keeps adding more higher-margin value-added products to its Fresh and Value-Added segment—which is the company’s main business. I believe 2024 will prove to be a much better year for FDP and its stock, assuming that the demand in its banana segment stays stable and that its businesses benefit from a more balanced ocean-freight market.

What Provides Safety To The Dividend.

Since 2002, FDP has increased its quarterly dividend from 5 cents per share to 25 cents per share. This is in line with the robust free cash flows that its operations have historically generated. Significantly, since the most recent increase—from 20 to 25 cents—was only recently disclosed, the business obviously anticipates having sufficient free cash flow to support all of its expansion plans and give back even more to its owners.

Information Services Group (III).

Who They Are.

Viewing the promotional video on the Information Services Group (III) website in Stamford, Connecticut leaves one with the impression that the $291 million (2023 revenue) business is at the forefront of every major global technology service on the planet, from cloud transformation to cybersecurity and generative AI. Information Services Group is actually just one of hundreds of businesses that offer consultancy and research services related to technology in a variety of fields, such as automation, cloud and data analytics, sourcing advice, managed governance and risk services, network carrier services, technology strategy and operations design, change management, market intelligence, and technology research and analysis. They promise to assist them in achieving increased operational productivity, lower costs, and faster growth. Their customers are primarily corporations, public sector organizations, and service/technology providers. The company says it serves about 900 clients, about 40% of whom are located abroad, and it employs 1,500 people across more than 20 countries.

Reasons For The Stock To Soar.

Similar to FDP, III’s stock has been struggling since a poor 2023 end was revealed in February. It has lost roughly 18% of its value so far this year. In particular, the final quarter’s revenues and adjusted earnings decreased by 10.8% and 52.7 % year over year to $66.02 million and 6 cents per share, respectively, and fell short of consensus estimates by $2.07 million and 3 cents. The business attributes the issues to consumer spending delays brought on by economic uncertainty as well as higher costs incurred by the company itself in trying to hold onto key personnel while it waits for business to pick up. Additionally, III disclosed that the company had to set aside $4.8 million for bad debt expense during the quarter due to a delinquent client based in Dubai.

III provided somewhat disappointing near-term guidance, predicting revenue and adjusted EBITDA of only $65–$67 million and $6–$7 million for the current quarter, respectively. Additionally, this shows that customer demand will continue to be restrained into 2024 as it is significantly less than the $74.7 million in sales and $104.4 million in adjusted EBITDA that analysts had predicted.

However, I think that the introduction of generative artificial intelligence (AI), their wish to use this technology in their research platforms and solutions going forward, and the uncertainty surrounding the best course of action have all played a significant role in the slower pace of decision-making by its clients. Before committing to a multiyear contract, its clients undoubtedly want to be certain that their research solutions will be able to take advantage of this disruptive and possibly productivity-enhancing technology. The majority of III’s clients are asking the company to integrate generative AI into their projects, despite the fact that the technology is still in its infancy and requires more understanding to apply and govern.

III’s years of experience assisting clients in acclimating to new technologies is good news. About AI, the company started a new enterprise AI advisory business at the beginning of this year to help clients navigate this complex adoption maze. With this new business, the company hopes to create a new and distinctive approach to sourcing AI by combining its dependable experience and technology sourcing, deep expertise in AI, and wide access to the provider ecosystem. In the final quarter of 2023, the company certified over 1,200 employees in Enterprise AI, scaling up its workforce training program to ensure III is able to take full advantage of the new opportunities in this pipeline that should continue to emerge from the rapid adoption of AI technology. This move actually contributed to the company’s lower profits during that period.

Then there is ISG Tango, a new sourcing platform from III that debuted in early March. All of the components of the current ISG FutureSource procurement system are automated. Utilizing III’s vast transaction data, provider assessments, and market insights, this new platform also features a virtual deal room for secure document exchange, user interaction, and document management. AI-powered ISG FutureSource can offer real-time predictive insights to expedite the transaction process. Additionally, it is anticipated to give III access to the underserved mid-market, which forks over roughly $130 billion a year for business and technology services.

These AI-centric growth platforms, in my opinion, are a major factor in III’s continued expectation to meet its target of raising its Ebitda margin from less than 13 percent in 2023 to 17 percent by 2025. Therefore, even though some observers predicted at the beginning of the year that this would materialize sooner rather than later, I expect it to happen quickly enough and strongly enough to justify purchasing III’s stock at these low prices.

Why the Dividend Is Safe.

Even though III has only been paying dividends on a quarterly basis since the middle of 2021, the company has increased the amount annually to 4 P.C. from 3 P.C. This half-price increase illustrates the company’s confidence in its ability to generate sufficient free cash flow to pay the dividend without compromising its capacity to finance expansion. I anticipate this to continue because cash flows and earnings are probably higher this year.

Acco Brands, Inc.

What Kind of Persons They Are.

ACCO Brands (ACCO) is a company based in Lake Zurich, Illinois that sells office supplies, video game system accessories, and school supplies. This includes a large selection of products sold under well-known brands like Five Star, Mead, Swingline, Kensington, and PowerA, including notebooks, binders, planners, filing supplies, staplers, shredders, and peripherals for video game consoles. With a market valuation of slightly less than $500 million, ACCO generated $1.18 billion in revenue in 2023. It distributes its goods via a number of channels, such as internet retailers, contract stationers, wholesalers, and retailers of office supplies.

Reasons For The Stock To Soar.

Encouragingly, ACCO announced net sales and adjusted earnings per share for the last quarter of 2023 of $488.6 million and 39 cents per share, respectively, surpassing the corresponding consensus estimates by $12.22 million and 6 cents. This was due to above-average demand. That 2024 prediction, though, was not as strong. In particular, ACCO sees comparable sales down 2.5 percent to 5.5 percent, net sales down 2.0 percent to 5% from the previous year to $1.74 billion to $1.788 billion, and relatively flat adjusted earnings of $1.07 to 1.11 per share. This is because the company expects demand trends to remain muted due to the uncertain macroeconomic environment. This is probably the main cause of the company’s shares’ 15% annual decline, as it is significantly less than the $1,862 billion and $1,20 that analysts had predicted prior to the announcement on February 22.

Yet, I believe that this slide fails to highlight the fact that ACCO met its key financial target, free cash flow. In fact, the company produced $117.5 million in free cash in 2023, helped by strong free cash flow production of $543.3 million in the last quarter. Its initial forecast of at least $100 million in 2023 was easily met, with production up 52% from $77.5 million in 2022. Because of this, ACCO was able to pay dividends and fund its growth plans while also lowering its debt by $88 million in 2023. A decrease in the company’s net leverage ratio from 4 points2 at the beginning of the year to a very manageable 3 points4 at the end of 2023 was another consequence of this.

Due to ACCO’s successful efforts over the last two years to increase profitability, its adjusted operating margin increased from just 9 points 0 percent in 2022 to 11 points 2 percent in 2023. This increase in margin doesn’t seem to be an anomaly, as its outlook for the year indicates expansion ahead of the anticipated decline in sales. The same can be said for its higher cash production, which is why ACCO anticipates building on its stellar 2023 performance and aiming for at least $120 million in free cash flow this year.

A materially higher valuation than the absurdly low forward price/earnings multiple of less than five is, in my opinion, justified by the company’s permanent increase in its margin profile and the decline in its leverage, which is still one of the biggest factors weighing on its stock, over the course of the last year. Furthermore, this excludes any benefits from the restructuring program, which was unveiled in January and aims to eliminate an extra $60 million in annual costs through actions to streamline the company’s operations, reduce headcount, optimize the supply chain, rationalize its global footprint, and make better use of its sourcing capabilities. Waiting for the much stronger profit performance this should lead to once sales growth picks back up is definitely worthwhile, especially considering the sizeable dividend you will receive in the meantime.

Why the Dividend Is Safe.

Among the companies I write about, ACCO has the highest leverage, which makes its dividend the least secure. However, the company’s stable free cash flow from operations has allowed it to pay this dividend despite the fact that its debt-service expense increased due to the significant increase in interest rates over the previous two years. With even less debt than it did a year ago and strong free cash flow expected to continue, ACCO should have no trouble funding its quarterly dividend payments, which have increased twice since they began in 2018—to 7 cents per share from 6 cents—despite the difficult operating environment for the majority of that time.

The SpartanNash (SPTN).

Who They Are.

SpartanNash (SPTN), based in Grand Rapids, Michigan, calls itself a “food solutions” company. It is a wholesaler and also operates grocery stores. Along with operating 144 supermarkets in the Midwest under the Family Fare, Martin’s Super Markets, and D&W Fresh Markets brands, the company also provides food products to independent grocery store operators, ranging from single locations to major regional supermarket chains, 160 military commissaries, and over 400 exchanges worldwide. Our Family, Open Acres, Crav’n Flavor, Culinary Tours, Full Circle Market, PAWS Happy Life, Pure Harmony, Simply Done, That’s Smart!, Tippy Toes, TopCare, and Wide Awake Coffee are just a few of the thousands of products sold under SPTN’s own private labels (think higher margins) and approximately 90,700 separate stock-keeping units (SKUs) that the company offers through its 19 wholesale distribution centers. The company generated $9.7 billion in revenue in 2023, and as of right now, its market capitalization is approximately $650 million.

Reasons For The Stock To Soar.

Since the end of 2022, no stock I’m writing about has decreased more than SPTN. That’s right—it fell 24 percent just last year, far less than the S&P 500’s gain of the same amount. That decrease rises to 37% in 2024 with an additional 18% decline.

Well, some of this has been justified, and I’ll be the first to admit that. In summary, SPTN not only ended 2023 on a lower note than anticipated, missing both the Street’s $2.41 per share target and its own adjusted earnings estimate of $1.85 to $2.10 per share in the fourth quarter, with net sales and adjusted earnings of $2.25 billion and 35 cents per share in the final quarter.

Still, not everything is as bad as it seems. Specifically, higher-than-expected noncash depreciation and amortization expense—which does not lower cash flow—was the primary cause of the slight earnings shortfall to end 2023. This was brought on by the significant increase in SPTN’s total depreciable asset base following a flurry of capital expenditures over the previous year to support its growth strategy. Not only were stock-based compensation costs significantly higher, but most companies actually do not include them in their reported earnings because they are also noncash in nature. I project that the increase in these expenses resulted in a roughly 6 cent decrease in earnings per share. However, as they aren’t real cash outlays, cash flows were unaffected.

Additionally, for this reason, I don’t think SPTN’s projection for 2024 is all that bad. In fact, the midpoint of the company’s $255 to $270 million adjusted Ebitda guidance of $262.5 million—which excludes the noncash items noted above—was actually higher than the $255.9 million consensus. Thus, not much has changed in terms of cash flow, which is, in my opinion, a far more important factor in determining a stock’s value than reported earnings.

Furthermore, the guidance suggests SPTN is still on course to increase adjusted Ebitda to $300 million annually by 2025. To reach that aim, the company is funding supply-chain projects, artificial intelligence, and automation. Actually, this year there are plans to make an additional $50 to $60 million in cost reductions. I anticipate that when these savings become a reality, SPTN’s stock will rise significantly.

Why the Dividend Is Safe.

For almost twenty years, SPTN has distributed quarterly dividends, which started out at one nickel and have now gradually increased to 21.75 cents per share. The cash flows generated by the non-cyclical nature of the products’ demand, which is met by its retail stores and its wholesale operations, are reflected in this. Further evidence that these payments are safe comes from the company’s decision to raise them at all, even though the most recent increase—of a quarter cent—was little.

Control and Location of Ituran (ITRN).

What Kind of People They Are.

In order to locate downed pilots, Israel’s Ituran Location and Control (ITRN) uses telematics technology to provide vehicle tracking services. In addition to fleet management and usage-based insurance applications that need secure high-speed data transmission and analysis, a large portion of its business is helping recover stolen cars. Car manufacturers, insurance companies, and retailers in nations like Israel, Brazil, Argentina, Mexico, Ecuador, Colombia, and the U.S. use its products and services. s. also Canada. With a market capitalization of roughly $530 million, Ituran generated $320 million in revenue in 2023.

Reasons For The Stock To Soar.

This stock differs slightly from the other four that are being discussed here because, over the last year, ITRN shares have performed better than the market, rising by roughly 22%.

However, in my opinion, the stock ought to have increased much more. ITRN’s earnings in the last quarter of 2023 met the consensus estimate because the gross margin in its Products segment held up better than expected, despite pressure from the Argentine peso devaluation and the conflict between Hamas and Israel, where the company is headquartered. Additionally, free cash flow for the company was $17.7 million. ITRN was able to end 2023 with a net cash balance of $53 . million, more than triple the $15.3 million it had a year earlier, thanks to this, which more than doubled the $8.2 million generated in the corresponding prior-year period.

The outlook is even better for 2024. According to ITRN’s initial forecast, net new subscriber additions should continue to be robust at 35,000–40,000 per quarter as it reaps the benefits of rising new car sales in Israel, an increase in insurance companies and car owners searching for location-based security systems, and the promotion of its products to financial services companies that finance new car purchases in developing nations. The increased subscriber base—up 9% from 2022—portends another year of strong top-line growth, which the company estimates will result in EBITDA of $90 to $95 million. This suggests record earnings at the midpoint, easily surpassing the $2.50 per share analysts had initially predicted.

Additionally, ITRN is optimistic about subscriber growth past 2024 and has set a target of exceeding $100 million in Ebitda for the upcoming year, indicating a faster rate of profit growth. This assurance is also demonstrated by ITRN’s decision to boost quarterly dividend payments to $8 million for the second straight quarter, up from $3 million and $5 million in the previous quarter. I still anticipate growth in free cash flow production and its cash pile despite this payout increase, which is currently at 40 cents per share.

It is my opinion that a company that is confident enough in its future prospects to almost triple this recurring cash commitment in six months, is expected to experience its highest revenue and earnings in history in 2024, and started the year with its strongest net cash position since 2011 shouldn’t be trading at less than 11 times its consensus earnings estimate for the current year and at such a large discount to the S&P 500, which is currently trading at more than 21 times its aggregate earnings forecast for 2024 across the board. It most likely won’t last long if ITRN meets its operational goals.

What Provides Safety To The Dividend?

As previously mentioned, ITRN has increased its quarterly dividend payouts by 167 percent in just the last two quarters, going from an overall sum of $3 million per quarter to $8 million (or about 40 cents per share). Put another way, ITRN’s dividend yield has doubled in the last year due to a payout increase that has outpaced the company’s stock price, in contrast to most of these other stocks whose higher yields have been driven by a sharp corresponding drop in share value over the same period. I fully expect more increases down the road if ITRN meets its longer-term profit growth targets, even though I don’t see that happening anytime soon.

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