TOP IDEAS: The Caldwell Partners International (TSX: CWL) enters fiscal 2014 raising its dividend. This is a good indication that earnings expectations are higher.
We don't recommend small cap stocks based solely on their dividend yields. But we sure take notice when a small cap company raises its dividend rate as a signal for future growth potential, like at Caldwell Partners International Inc. (TSX: CWL - $0.88).
Caldwell Partners is a North American executive search firm whose focus is on the high end of the employment search market; for CEOs, presidents and senior level positions where an executive search is seen as an important business investment rather than an expense.
We wrote our last blog post on Caldwell Partners just three months ago (See: Caldwell Partners International is set to finish 2013 strong) after we felt the very sluggish start in the financial performance in 2013 for this executive search firm was about to change. Despite the small operating loss reported for fiscal 2013, revenues for the year still grew (slightly). But if you read the Company's 2013 fiscal Q4 earnings release which reported revenues jumped 17% with earnings per share (EPS) of $0.045, all indications show that there is a positive turn in business for the year ahead.
Although historically rising revenues in the back half of this Company's fiscal year tends to be the norm, this year the outlook forward is distinctly more positive than the same time last year.
Why? Here are three reasons:
First and foremost, the Board of Directors of Caldwell Partners had decided to increase the Company's dividend payout by 17%, beginning in fiscal 2014 to a quarterly rate of $0.0175 ($0.07 annually) per share. For a small company to offer a dividend payout it must have a predictable cash flow. To increase this payout hints that revenue growth and profitability are on the rise.
US revenues for Caldwell Partners represented 66% of the $33.8 million in consolidated revenues in fiscal 2013. Revenue derived in the US for the last quarter was up 20%, reflecting billing increases of 34% from higher executive search volumes -- partially attributed to the lift in economic activity in the second half of fiscal 2013. Continuation of a recovery in the United States and Canada should generate more executive search service demand.
Among the executive search firms in North America, the Caldwell Partners' brand is strong, which attracts high-calibre search professionals to join as partners. Five such partners came to the Company in fiscal 2013 and more are expected join in 2014. The momentum of adding top-producing executive search partners to the team should have a very positive impact on future revenues.
Since we added Caldwell Partners International to our Top Ideas list about one year ago (See: Caldwell Partners International: US expansion pays "dividends” for small cap value investors), the investment return to date is a modest 29%, if you include the quarterly dividend payouts. Based on the Company's Q4 results and outlook we still see the upside potential in this stock from its current valuation. Therefore, we continue to recommend for small cap value investors that Caldwell Partners shares should be accumulated up to a price of $1.30. But this year the bonus is: A higher dividend payout (and maybe next year too.) The stock currently trades at a very generous annual dividend yield of 8%.
The Company's balance sheet remains strong with cash holdings and no debt.
Caldwell Partners has approximately 17 million shares outstanding.
The Caldwell Partners International website: www.caldwellpartners.com
Author ownership disclosure: TSX: CWL - YES
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