By Marc Robins CFA
Make investments that pay dividends!
Oh, you want more background on this declaration. OK. All you need to know is the name Andrew Carnegie…like in Carnegie Libraries, Carnegie Hall or US Steel (nee Carnegie Steel).
Once you set aside all the PC “fog” about man who was and is one of the wealthiest humans alive and focus more on the “good” the man did, his is a story worth at least knowing and understanding some of the aspects that made this peer among philanthropists worthwhile. To start, let’s just say that as a small child he started like as a “bobbin boy” in the woolen mills of Scotland and as an immigrant to the USA used hard work, the tutelage of employers and studious availability of a “free” library to teach himself to read as well as garner substantial knowledge.
As he came into his own as a businessman, he understood that cash flow from his investments was paramount not only when calculating returns but as a means of supporting his ability to place those dividends back to work in other endeavors or to purchase additional plant and equipment. Dividends were key!
I guess the next question what is a “dividend?” How is it different to interest paid on loans and passbook savings accounts (whatever those are and how do you define “miniscule” or “infinitesimal”?) If you loan out money, you expect to receive that loan back ‘paid in full’ at some certain point in the future. Along with the borrowing, the lender expects to receive some sort of payment for the use of that money during the time you have had in your procession or used it to buy something or invest in something. The point is a loan is made up of a present value (the amount received on day #1), the future value (the amount to be paid back at the end of the loan), the time (T) the loan is outstanding and lastly some sort of interest, or additional amount, (i ),to be paid back. The thing that makes this and dividends a little confusing is that interest can be paid back over time in increments…Think of your car loan or mortgage where each payment of principal also includes an increment for the interest. it can also be paid in a lump sum.
Conversely, dividends are cash payments paid back to the investor on investments, but it is part of the reward for taking the risk in making said investment. You may lose the entire investment.
You might be very fortunate and not only get periodic dividends but also receive a substantial (reward) return on the investment when it is sold. This is patently different from a debt or loan where the lender is “guaranteed” via contract the repayment of the principal amount and interest.
Moving on to equity, or stock investments. These are just that….investments. There are big companies (Apple, IBM, Exxon, Union Carbide, Google…) and the likelihood of them going “bust” is low, but not impossible. Some pay the shareholder a quarterly, cash dividend out of their earnings. Money that you can spend or, like Carnegie, re-invest. Smaller companies, which in has been the focus of my professional life, often don’t pay dividends. They typically spend all their earnings back into the business to grow their own operations more rapidly and take advantage of the markets they address. Some small companies have such good returns, face excellent futures and can still pay shareholders a quarterly dividend.
That said, here are three companies that are interesting operations that are distinctly positioned to grow in their respective markets and pay dividends that appear enticing compared to passbook savings yields…..
Acme United Inc. (NYSE: ACU-$14.30) produces and sells scissors, sharpeners, rulers, lettering products, garden tools, axes and saws as well as safety products and first aid kits. If there is a cutting, measuring or first aide product found in the home, school, office, hardware or sporting goods retailer, it was probably manufactured and distributed by Acme. This Company that has been around since the Civil War pays a $0.40 annual dividend (10¢ per quarter). The stock has come under pressure with the recent market decline and used to sell at $20.00 per share. So, one might consider that a good portion of the market risk is out of the shares at this time.
Ditto with one of my favorite companies—Psychemedics, Inc. (NASDQ: PMD-$11.09) This operation uses body hair for the detection of drugs. By using their patented and FDA-approved hair analysis chemical processes, they can take a few strands of hair (typically 15 to 20, one-and-a half inch hair strands clipped the back of the scalp) and provide a medical history of illicit drug use. This is far more sensitive that urine-analysis: It provides a 90-day record of use and can not be adulterated or masked like any other analysis process. PMD is called upon to provide their detection services almost entirely when companies are screening new hires, or providing company maintenance screens to keep their operations “drug free.” It is also the premier provider of services to police and government agencies as well as railroads, oil companies, auto manufacturers, banks, etc. The stock is also down from a recent high of $17.66 per share but now provides a $0.60 dividend for a 5.41% yield. I like these share now because the country of Brazil passed into law requiring a mandatory drug screening test and periodic updates for all truckers in their country. Because PMD is the world leader in hair analysis for the detection of illicit drugs, there is a high likelihood that the company’s business could actually double given this new national law.
Lastly, what makes more sense that computers designing drugs? You’ve probably heard of the term, “designer drugs” when it comes to invention and production of illicit compounds. Well, Simulation Plus, Inc. (NASDAQ:SLP-$9.95) provides computer modeling software for ethical drug discovery and development. Their tools can cut years and billions off the drug development cycle as well as help pharmaceutical companies avoid costly compounds that don’t perform. For instance, it’s software can simulate drug absorption characteristics, pharmacokinetics, and pharmacodynamics as well as a raft of other characteristics regarding the modeling of dissolution, functionality, and its safety profiles. SLP has an international clientele of pharmaceutical companies as well as an equally impressive list of regulatory agencies that “buy” seats to their platform. This stock has actually moved from the $6.00 range to as high as $11.00 during the market sell-off. It pays a $0.20 annual dividend yielding 2.00%.
Please be advised that Mr., Robins and/or members of his family own shares, or may be adding to their positions or have intent to purchase the above mentioned securities.
By Marc Robins CFA