Chuck Royce’s 5 Dividend Value Stocks

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Chuck Royce is President and Co-Chief Investment Officer at Royce & Associates, LLC and President of The Royce Funds, a family of funds focused on the smaller-capitalization market. Royce has nearly five decades of investment experience and four decades as smaller-company value portfolio manager. Throughout his career he has applied a disciplined value approach in selecting winning small-cap stocks that produce strong total returns. Royce co-manages with Jay Kaplan a specialized value-oriented and dividend-focused mutual fund, the Royce Dividend Value Fund (RYDVX), which invests in micro, small, and mid-capitalization stocks valued up to $5 billion. The fund’s investment objective is long-term growth of capital and current income. The fund has returned 7.9% since inception in 2004 and 25.85% over the past year. It consists of 256 holdings, with 33% of net assets invested in financial stocks. The fund has an annual operating expense of 1.5%.

Chuck Royce

The Royce Dividend Value Fund pays a dividend yield of 0.7%. Many of the fund’s constituent stocks pay higher dividend yields. Here is a closer look at five selected value stocks with solid balance sheets and earnings power that have dividend yields at or above 2%, yielding in excess of the 10-year Treasuries. These stocks would represent good additions to value-oriented income portfolios.

Owens & Minor Inc. (NYSE:OMI) is a $1.8-billion distributor of medical supplies and a provider of third-party logistics and other supply-chain management services to healthcare companies and suppliers of medical and surgical products. The company pays a dividend yield of 3.1% on a payout ratio of 51%. Its rivals Baxter International (NYSE:BAX), Cardinal Health (NYSE:CAH), and McKesson Corporation (NYSE:MCK) pay dividend yields of 2.7%, 2.6%, and 0.8%, respectively. Over the past five years, Owens & Minor Inc.’s EPS and dividends grew at average rates of 15.3% and 14.2% per year, respectively. Analysts forecast that the company’s EPS growth will average 7.8% per year for the next five years. The company recently issued weak guidance for 2013, below analyst expectations, with revenue growth of between 2% and 4% and EPS of between $1.90 and $2.0, below $2.07 forecast by analysts. The stock has a high free cash flow yield of 2.1% and ROE of 11.5%. The stock is attractive on valuation. Its forward P/E is at 14.5x, below its respective industry’s ratio of 16.8x. On a price-to-book basis, with the ratio of 1.8, the stock is undervalued relative to its respective industry (with the ratio of 2.8). Contrarian value investor David Dreman is also bullish about this stock.

Mine Safety Appliances Co. (NYSE:MSA) is a $1.4-billion provider of products that enhance the safety and health of workers in a number of industries. Some of its notable products include respiratory protective equipment, gas detection instruments, ballistic protection as well as head, eye, face, and hearing protection products. The company that has raised dividends consistently since 1972 pays a dividend yield of 2.8% on a payout ratio of 48%. MSA’s smaller competitor Lakeland Industries Inc. (NYSE:LAKE) does not pay any dividends, while peers Honeywell International (NYSE:HON) and 3M Company (NYSE:MMM) pay lower dividend yields of 2.7% and 2.5%, respectively. Over the past five years, MSA’s EPS grew, on average, by 1.6% per year, while dividends expanded at an annual rate of 10.4%. The company is forecast to see its EPS growth accelerate to an average rate of 9.0% per year for the next five years. The company’s free cash flow yield is 4.3% and ROE is 18.4%. In terms of valuation, the stock has a forward P/E of 15.6x, trading below its five-year average ratio. The stock is also undervalued relative to industry based on price-to-sales and price-to-cash flow ratios. Earlier this month, MSA issued a special dividend of $0.28 per share (equal to a 0.72% yield) due to the scheduled dividend tax hike next year. The one-time dividend will be paid on December 28 to shareholders of record on December 14. RenTech’s billionaire Jim Simons holds a small stake in the stock.

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