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%.
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.
Graco Inc. (NYSE:GGG) is a $3.1-billion company that produces pumps and pumping equipment and other devices to handle and apply industrial liquids, such as lubricants, sealants, and paint. The company, which has raised dividends since 2000, currently pays a dividend yield of 2.0% on a payout ratio of 45%. Its competitors Illinois Tool Works (NYSE:ITW) and Nordson Corporation (NYSE:NDSN) pay dividend yields of 2.4% and 1.0%, respectively. Over the past five years, Graco Inc.’s EPS grew at an average annual rate of 1.3%, while its dividend increased at a rate of 6.4%. Analysts forecast that the company’s EPS growth will accelerate to an average rate of 8.5% per year for the next five years. The stock boasts a free cash flow yield of 3.5% and high ROE of 32%. Its forward P/E is at 18.6x versus a higher 25.3x for the industrial machinery industry. While elevated, the stock’s forward P/E is below the stock’s five-year average ratio. Fund managers Robert Rodriguez and Steven Romick (First Pacific Advisors—see its top holdings) own about $38 million in the stock.
Hubbel Inc. (NYSE:HUB.B) is a $4.9-billion diversified electrical supplier, serving electric utility, residential, commercial, and industrial markets. It pays a dividend yield of 2.1% on a low payout ratio of 33%. The company’s rival Eaton Corporation Plc (ETN) pays a dividend yield of 2.9%, while Amphenol Corporation (NYSE:APH) yields 0.7%. In early December, Hubbell Inc.’s Board of Directors approved accelerating the regular quarterly dividend payment from January 2013 to December 2012, to avoid higher dividend tax starting next year. The accelerated dividend will be paid on December 26 to shareholders of record on December 14. Over the past five years, the company’s EPS and dividends grew at average rates of 11.3% and 5.0% annually. The EPS is forecast to continue to grow at the same rate for the next five years. The company has a free cash flow yield of 3.5% and ROE of 19.2%. Its forward P/E stands at 15.6x, trading at a premium to its respective industry with a forward P/E of 13.8x. However, the stock’s forward P/E is below its five-year average. Billionaire fund manager Steven Cohen owns almost $117 million in the stock.
Applied Industrial Technologies (NYSE:AIT) is a $1.7-billion company selling industrial products for maintenance, repair, and operational needs. The company also supplies original equipment manufacturing applications. It pays a dividend yield of 2.1% on a low payout ratio of 32%. Its main competitors Kaman Corporation (NYSE:KAMN) and W.W. Grainger, Inc. (NYSE:GWW) pay yields of 1.8% and 1.7%, respectively. The company’s EPS increased at an average rate of 5.6% per year over the past five years. Over the same period, its dividend expanded at an average rate of 9.2% annually. A similar rate of dividend growth is likely to be sustained in the future as the company’s EPS growth is forecast to accelerate to an average of nearly 14% per year for the next five years. Applied Industrial Technologies Inc. has a free cash flow yield of 2.4% and ROE of 16.8%. The stock has a forward P/E of at 13.7x, trading at a discount to its respective industry (with a forward P/E of 19.6x). Relative to its industry, the stock is also discounted based on price-to-book, price-to-sales, and price-to-cash flow ratios. ACQ Capital’s Cliff Asness holds a small, near $11-million stake in the company.
