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5 Small Companies Boosting Dividends

Plenty of company announcements can cause stock ticker prices to rise: big contract wins, important drug approvals and so on. But most good news is priced into shares as quickly as professional investors can do the math. For ordinary investors to profit from news, they need something that pushes stock ticker prices more gradually. They need what researchers call drift.

Drift is a market-beating rise in share prices that occurs gradually over several months or even years after the public learns of new information. A handful of mostly mundane phenomena have been shown to reliably produce it. Upside earnings surprises are probably the most-cited example (“post-earnings announcement drift”), and one that this column has covered several times. But dividend increases cause drift, too. The results are especially strong for small-company stock tickers.

One study, published in 2003 in Applied Economics, looked at 27 years of dividend changes. It found that companies that increased payments showed evidence of drift for four years afterward, outperforming the broad market by a total of 8.6 percentage points. Only about 30% of the drift was concentrated in the first year. Small and midsize companies showed much greater drift, beating the market by 11.5 and 8.8 percentage points, respectively, over four years. (Shares of companies that cut dividends reacted negatively and more strongly, which is no surprise given that cuts tend to be more than three times as large as increases.)

At the moment, dividend increases should be especially prized. Standard and Poor’s reports that the first quarter of 2009 was the worst for dividends since its record-keeping began in 1955. Within the broad market, there were 367 decreases versus 83 the year before and 17 the year before that. Against such a bleak background, a payment increase signals financial strength, confidence and an ability to weather an economic downturn—in addition to the likelihood of handsome returns to come.

Below are listed five companies selected from the S&P MidCap 400 and SmallCap 600 indexes. Each has increased its dividend payments for at least 10 years running, and has a modest stock ticker valuation and growing or stable earnings.

Church & Dwight (CHD) stock ticker, long <a href=” tickers/Condom-Maker-Can-Offer-Upside-in-Down-Markets-22296″>recommended by this column, has gained 44% over the past three years, while the broad stock ticker market has lost about 30%. The company’s products include Arm & Hammer baking soda, Orange Glo cleaners, First Response pregnancy tests and Trojan condoms—household and personal items that aren’t especially sensitive to economic lulls. Sales and profits for the company are seen rising this year and next. Management should be a little more generous with dividends, though. Payments have increased regularly, but they’ve lagged well behind profits and the share price, so the company will likely pay out just 11% or so of profits this year, and shares now yield less than 1%.

Ross Stores (ROST) is a rarity among clothing chains in that its sales and profits are increasing. This column <a href=” tickers/Discount-Retailer-Survives-Toughest-Value-Screen-20579″>recommended the stock ticker in January 2007. It’s up 15% since then, which means it has beaten the broad market by more than 50 percentage points. Ross’s motto is Dress for Less; like TJ Maxx, it uses opportunistic merchandising, scooping up overstock tickers from other chains or cancelled orders from manufacturers, and scoring deep discounts in the process. A plunge in consumer spending has left plenty of excess clothing for Ross to choose from, while a shift in shopper preference toward discount chains has kept traffic strong.

Screen Survivors
COMPANY TICKER Industry Share Price ($) Forward P/E Yield (%)
Data as of May 18, 2009
Ross Stores ROST Clothing Stores 35.19 14 1.3
Owens & Minor OMI Healthcare Supplies 34.07 13 2.7
Beckman Coulter BEC Healthcare Equipment 52.43 14 1.3
Church & Dwight CHD Household Products 52.8 16 0.7
Vectren VVC Utilities 21.74 12 6.2

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