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
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.
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.
This is due to expectations of higher rates, given that in January 2012 the company filed a general rate case application requesting rate increases of 21.51% in 2013, 4.87% in 2014, and 12.59% in 2015. The approval is still pending, while interim rates are in effect now. The company has a ROE of 8.3%. In terms of valuation, like other water utilities featured in this article, SJW Corp. (NYSE:SJW) is somewhat pricey, trading at a forward P/E of 20.2x, above the water industry’s forward multiple. Last quarter, the stock was a holding in Mario Gabelli and Chuck Royce’s hedge funds.
But wait, there’s more
The company’s financial performance has been under pressure due to falling natural gas prices. Natural gas rates to customers have declined for four consecutive years now, dropping 30% since 2008. According to the company, this price decline has saved its customers over $400 million over that period. In contrast with falling rates, customer count has been increasing—it grew 0.9% last year and 0.8% in 2011. The utility projects its EPS in the range of $2.15-$2.35 in FY2013, with the guidance midpoint above last year’s EPS of $2.22. In terms of valuation, this stock is priced at 19.4x forward earnings, above its respective industry’s multiple. As regards hedge fund interest, billionaire Ken Griffin was bullish on Northwest Natural Gas Co (NYSE:NWN) last quarter.
The company’s dividend grew at an average CAGR of 21.0% over the past five years, which compares to American States Water Co (NYSE:AWR)’s EPS CAGR of 16.8% over the same period. Its latest dividend increase of 27.0% in September 2012 was above the five-year average. However, going forward, the company’s target five-year CAGR for dividend growth is 5%.
For the reference, American States Water has achieved five-year revenue and net income CAGRs of 9% and 14%, respectively. It too operates in a favorable regulatory environment, which provides financial stability and security of its dividend payouts. Its ROE of 12.5% is higher than comparable metrics for its peers mentioned in this article. As regards its valuation, American States Water Co (NYSE:AWR) is priced at 20.5x forward earnings, above its industry. Last quarter, RenTech’s Jim Simons boosted his small stake in this stock.
Final thoughts
Interestingly, three of the stocks mentioned above are U.S. water utilities. This is a space that doesn’t receive much—if any—excitement in the blogosphere, but with the track record this “fab five” has, it’s difficult for income investors not to pay attention. American States, Northwest Natural, SJW Corp. (NYSE:SJW), ABM and California Water Service Group (NYSE:CWT) each offer safe dividend growth plays for income investors; however, they generally carry a premium for their yield “safety” and inflation-beating dividend growth. Still, this is a group of stocks worth watching, that’s for sure.
Disclosure: none
