Although you might be tempted to call me crazy, one such stock does actually exist. Is this stock too good to be true? Or are there underlying risks investors need to first consider before gleefully buying shares?
Dial 1-800-PetMeds
Petmed Express Inc (NASDAQ:PETS) operates as a retailer of pet pharmaceutical products in the United States under the brand 1-800-Petmed Express Inc (NASDAQ:PETS)’s.
The stock has a $320 million market capitalization, and the company does approximately $230 million in sales per year.
Pet pharmaceuticals is an extremely competitive operating environment. The threat of larger retail competitors is a constant danger. Furthermore, as such a small company, Petmed Express Inc (NASDAQ:PETS)’s is fairly reliant on inexpensive advertising to keep leveraging its brand and expanding its footprint. This explains why Petmed Express Inc (NASDAQ:PETS)’s goes through periods of very difficult bumps in the road.
Petmed Express Inc (NASDAQ:PETS)’s struggled in fiscal 2013, as sales fell 4.4% versus fiscal 2012. That being said, diluted earnings per share rose 7.5% from the prior year, thanks to the company’s focus on cost-cuts.
Fortunately for shareholders, the company righted the ship in the first quarter. Net sales rose nearly 8% and EPS jumped 22% versus the first quarter last year.
Moreover, shareholders got another reason for optimism when the company increased its dividend by 13%.
Small-caps with stronger track records
You may be concerned about Petmed Express Inc (NASDAQ:PETS)’s questionable growth in recent periods, and nobody could blame you. If you’re interested in small-cap stocks but desire companies on firmer financial footing, you’re still in luck.
This past May, American States Water Co (NYSE:AWR) said that its board of directors had approved a 14% dividend increase. The company’s new payout, $1.62 per share annualized, represents a 2.5% yield going forward.
American States Water Co (NYSE:AWR) is no stranger to providing its investors with healthy dividend raises. The company, which operates as a water and electric utility in California, represents the gold standard among dividend payers; American States Water Co (NYSE:AWR) has provided investors with 59 consecutive years of increases in its aggregate annual dividend, according to the company.
Clearly, utilities generally carry stable businesses, so there’s almost no reason to worry about American States Water Co (NYSE:AWR)’s dividend sustainability.
Likely to fly under most investors’ radars is Mercury General Corporation (NYSE:MCY), a $2 billion market-cap company that operates in the property and casualty insurance industry.
Mercury General Corporation (NYSE:MCY) not only has a fantastic track record of increasing dividends, having raised its shareholder payout for 26 years in a row, but the stock also has a great current yield of 5.5% annualized.
Mercury General Corporation (NYSE:MCY) fits the definition of a slow-and-steady dividend stock, paying investors a high yield and providing reliable growth. Recently, the company reported that premiums written rose 2% in the second quarter and 3% over the first six months of the year.
The bottom line
Small-cap companies often have greater growth potential than their large-cap counterparts due to their smaller sizes. Smaller companies may have more room to run, and as a result, Ped Meds may be worth buying. Investors looking to diversify into smaller stocks while continuing to collect compelling income from their investments may want to take a closer look into Pet Meds.
However, that’s not to say Pet Meds isn’t without risk. Intense competition, particularly from larger online as well as brick-and-mortar competitors, serves as a huge drag on the company. This is clearly being reflected in Pet Meds’ fairly uninspiring operating results over the past couple years.
I can’t fault investors for finding a 4% yield from a small cap attractive, particularly when the company has just increased its dividend. Therefore, I’d classify Pet Meds as a solid hold, advising Fools who don’t own the stock to wait for the fundamentals to show more consistency before jumping in.
The article Should You Buy This 4% Yielding Small Cap Stock? originally appeared on Fool.com and is written by Robert Ciura.
Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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