Here are 8 promising small-cap stocks that offer income

  • By Andrew Bary,
  • Barron's
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Small stocks and high-dividend stocks are back in vogue after being hammered in the wake of the pandemic in March.

There could still be more appreciation in high-dividend small-capitalization stocks as the U.S. economy recovers in 2021, given these companies’ domestic orientation. Small-caps have trailed the S&P 500 index (.SPX) in recent years.

Barron’s screened the S&P SmallCap 600 index (.CVK) for some of its highest-yielding stocks, based on data from S&P Dow Jones Indices. We excluded real-estate investment trusts, which dominate the list of high-yielders, to get a more diversified group of eight stocks.

In the past two months, Barron’s also screened the S&P 500 index and the S&P MidCap 400 index (.MGD) for high-dividend stocks. Many of those stocks are up sharply since those two articles appeared.

Most of the eight small-caps are little known on Wall Street, making them potentially fruitful for income-oriented investors.

They are B&G Foods (BGS), the owner of the Green Giant, Cream of Wheat, and other food brands; South Jersey Industries (SJI), a natural-gas utility; Vector Group (VGR), the owner of the Liggett cigarette business, Universal (UVV), the leading global provider of tobacco leaf to the cigarette industry, and Archrock (AROC), a provider of natural-gas compression services.

Rounding out the list are three small banks: Provident Financial Services (PFS); Hope Bancorp (HOPE), and Northwest Bancshares (NWBI).

B&G Foods, whose shares trade around $29, tops the list with a 6.5% yield. It owns a portfolio of relatively mature brands. In October, it agreed to buy the Crisco oil business from J.M. Smucker (SJM) for $550 million in cash in a deal that is expected to be meaningfully accretive to earnings.

Like other food companies, B&G has gotten a lift as Americans eat more meals at home this year. Sales are expected to rise about 20% in 2020. The company, which has ample debt, trades for about 13 times projected 2021 earnings.

Vector Group has an unusual mix of businesses: cigarettes and real estate. It owns Liggett Group, the No. 4 U.S. cigarette maker with a 4% share. Liggett’s discount brands include Pyramid, Grand Prix, and Eve. Vector also owns Douglas Elliman, the largest residential real-estate brokerage firm in the New York metropolitan area and the fourth-largest in the country. Vector also has a group of real estate investments around the U.S.

Vector’s shares, at around $13, yield 6.3% and trade for about 15 times 2021 earnings. The stock offers a play on a recovery at Douglas Elliman, which has operated at close to break-even in the past year.

Universal, whose shares trade around $51, yields 6%. The company, which has virtually no analyst coverage, is the top global tobacco leaf supplier with operations in 30 countries. It follows what it calls “conservative and prudent financial management.” It boasts a 50-year record of higher dividends, although increases in recent years have been small.

South Jersey Industries, based in Atlantic City, provides natural gas to 700,000 customers in the region and operates a renewable power subsidiary. It also has a stake in the proposed PennEast natural-gas pipeline in Pennsylvania and New Jersey. Its shares, around $23, yield 5.3%.

Archrock’s compression services facilitate the flow of natural gas through pipelines. Its shares, at around $9, yield 6.4%. The company is leveraged, with long-term debt of $1.7 billion exceeding its market value of $1.2 billion.

The company is profitable and expects to pay down about $100 million of debt this year while comfortably covering its dividend from free cash flow.

With U.S. natural-gas production expected to decline in early 2021, the company expects continued softness in compression demand but CEO Brad Childers says he is upbeat on the “positive long-term fundamentals” for the business given the role of gas as a cleaner-burning fossil fuel.

Hope Bancorp, based in Los Angeles, is the parent of the Bank of Hope, the only Korean-American superregional bank in the country, with nearly $17 billion in assets. Its shares, at around $11, yield 5.2%.

The bank’s results have been pressured by higher loan-loss provisions and it has sizable exposure to loans backed by hotels, motels, and retail commercial real estate.

KBW analyst Chris McGratty has a Market Perform rating on the stock. He noted last month that the bank’s earnings of 25 cents a share for the third quarter covered the 14-cent quarterly payout and that the stock trades at a discount to tangible book value, below the peer average.

Northwest Bancshares, parent of Northwest Bank, is a Pennsylvania-based regional whose shares trade around $12 and yield 6.1%.

The bank reported a smaller credit provision in the third quarter than during the first and second quarters as earnings totaled 30 cents a share, compared with 31 cents in the year-earlier quarter. The stock trades at a nearly 40% premium to tangible book value.

Shares of New Jersey’s Provident Financial Services, parent of Provident Bank, trade about $18 and yield 5.2%. Nine-month earnings for 2020 have totaled 84 cents a share, down from $1.34 in the same period of 2019 reflecting higher credit provisions, but overall loan quality remains strong. Current earnings comfortably cover the dividend. The stock trades for about 1.25 times tangible book value.

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