Small-cap investing entails higher risks than investing in large-cap blue chip companies, but there are many ways that your peers are beating the market in this space. Still, for dividend investors, investing in small-cap stocks with an impeccable record of dividend growth that stretches over several decades provides a degree of safety and regularity of ever-increasing income flows. Like their large-cap counterparts, some small-cap stocks boast consistent earnings power through all economic cycles and generate strong cash flows that provide for nearly guaranteed dividend increases year after year.
Among these kinds of small-cap stocks, there are five with more than 45 years of consecutive annual dividend increases.
Let’s take a look
California Water Service Group (NYSE:CWT), the third largest investor-owned water utility in the United States, has raised dividends for 45 consecutive years. The stock yields 3.2% on a payout ratio of 70% of its current-year EPS estimate. Over the past five years, the company’s dividend grew at an average CAGR of 18.5%, more than double its EPS CAGR, which averaged 7.7% annually over the same period. The company operates in the areas that are experiencing relatively fast population growth, which bodes well for its organic customer growth. Its business is mainly regulated, so the company is awaiting a rate decision on its 2012 General Rate Case filed back in mid-2012, envisioning rate increases of 19.4% for 2014, 3.0% for 2015, and 2.9% for 2016.
The company also requested approval to invest some $480 million in utility plant. Analysts forecast the company’s EPS growing at an average CAGR of 6.0% for the next five years. The company has a ROE of 10.6%. In terms of valuation, California Water Service Group (NYSE:CWT) is pricey, trading at a forward P/E of 22x, well above the forward multiple of its respective industry. Last quarter, the stock was popular with hedge fund manager Israel Englander, who boosted his California Water Service Group (NYSE:CWT) share holdings by 276% to about 200,000 shares.
ABM Industries, Inc. (NYSE:ABM), a facility management services company, has raised dividends for 45 years in a row. It yields 2.8% on a payout ratio of 43% of the current-year EPS estimate. Its dividend grew at an average CAGR of 3.8% over the past five years, slower than the company’s EPS growth of 5.8% annually over the same period. Since 2000, the company’s revenues have more than doubled—reaching a record high last year—while its adjusted EBITDA has nearly tripled. Over the same period, ABM’s dividend has increased by 87% cumulatively. In the 2010-2014 period, the company aims to capitalize on outsourcing, vertical expertise, and consolidation of services. It is also pursuing expansion through accretive acquisitions.
While ABM Industries, Inc. (NYSE:ABM) is targeting double-digit adjusted EBITDA growth, its adjusted EBITDA and EPS growth has been modest over the past five years. Analysts see weak EPS growth going forward, forecasting a long-term EPS CAGR of only 1.0% for the next five years, suppressed by weak government spending. Still, the company recently provided FY2013 guidance for adjusted income from continuing operations ($1.35 to $1.45 per diluted share) that exceeded the analyst consensus estimate ($1.36 per diluted share). ABM Industries, Inc. (NYSE:ABM) is trading at 15.2x forward earnings, below its respective industry. The stock is one of holdings in small-cap value investor David Dreman’s portfolio.
SJW Corp. (NYSE:SJW), a holding company for water utilities in San Jose, California and Texas and a commercial buildings and undeveloped land business, has raised dividends for 45 consecutive years. At present, the stock yields 2.8% on a payout ratio of 55% of the current-year EPS estimate. Over the past five years, the company’s dividend grew at an average CAGR of 13.5%, faster than the 8.5% annual rate of the company’s EPS growth over the same period. While the company’s EPS growth has been robust, analysts expect an even faster rate of EPS growth for the next five years, averaging about 14.0% annually.