Small caps, or stocks generally with market capitalizations below $2 billion, are a favored asset class. They tend to offer higher growth potential than mega-caps, because of their smaller sizes.
And, small caps that pay dividends to shareholders are also attractive for income.
A scan of the U.S. stock market produces a few stocks that offer investors the best of all qualities. We’ve uncovered three stocks have market caps below $1 billion, leaving them plenty of room for growth.
In addition, these three companies are all highly profitable, thanks to their consumer-focused business models, and their stocks have valuations well below the S&P 500 average.
This gives them the financial leeway to pay hefty small cap dividends as well, making the three stocks attractive for value and income investors alike.
DineEquity (NYSE: DIN)
The casual restaurant space has been hit hard over the past year. Economists have dubbed it the “restaurant recession,” as sales are falling across the industry.
At the core of the problem is that consumers are not going out to eat as much as they used to. With the proliferation of online food delivery services, the convenience of ordering in has stifled casual restaurants.
In addition, consumers are visiting malls less often; that an added headwind for restaurant foot traffic.
Add it all up, and it’s easy to see why DineEquity stock has lost half its value from its 52-week high.
DineEquity owns the Applebee’s and IHOP restaurant chains.
Comparable-restaurant sales, which measures sales at locations open at least one year, fell 7.2% at Applebee’s and 2.1% at IHOP last quarter, respectively.
DineEquity is also dealing with turmoil among management. It recently lost its CEO and CFO in the span of a week.
But this turbulence is likely temporary. The company continues to open new restaurants, especially in the international markets.
For example, IHOP expects to open 75-90 new restaurants this year, most of which will be overseas. International expansion is a growth catalyst, that can help offset weak domestic results until conditions improve.
In the meantime, DineEquity stock trades for a P/E of just 9.
And, the company is highly profitable. Last year, DineEquity earned $5.33 per share. This helps the company pay a robust 7.3% dividend yield, which does not look to be in danger.
PetMed Express (NYSE: PETS)
PetMed Express is a marketer of prescription and non-prescription pet medications, health products, and other supplies for dogs and cats.
It is a licensed pharmacy, and operates the 1-800-PetMeds brand. It offers over 3,000 different products, including a variety of private label products.
According to PetMed Express, it is the largest pet pharmacy in the U.S.
PetMed stock trades for a reasonable P/E of 18, which is below the S&P 500 average PE of 26.
And, PetMed offers a solid 3.9% dividend yield.
PetMed faces intense competition in the pet pharmacy space, from much larger established retailers. This could be intimidating for PetMed, which has a market cap of just $420 million.
However, it has carved out a firm position for itself in the industry, with a widely-recognized brand and an effective marketing campaign.
PetMed’s sales increased 3.3% last quarter, thanks to a 6.8% increase in new order sales. Over the first nine months of its current fiscal year, the company reported 12% growth in earnings per share.
The company has an added margin of safety, with a strong balance sheet. It ended last quarter with $62 million in cash and short-term investments, compared with just $7 million in total liabilities.
Rocky Mountain Chocolate Factory (NYSE: RMCF)
Rocky Mountain Chocolate Factory is the smallest stock on this list by far. With a market cap of just $65 million, it qualifies as a micro-cap.
But investors should not be scared away. The company has a strong brand and a highly profitable business model.
Rocky Mountain Chocolate Factory owns and operates gourmet chocolate and confection stores, as well as frozen yogurt stores. Its stores are both company-owned and franchised.
It manufactures a wide range of premium chocolates and other confectionery products.
The company has paid a dividend for 14 years. This stock with small-cap dividends has current yield of 4.5%.
Surprisingly, Rocky Mountain has a significant international footprint. It has opened stores in Canada, Japan, Turkey, South Korea, the Philippines, Saudi Arabia and the United Arab Emirates.
Last quarter, the company’s franchisees and licensees opened four international licensed stores, one domestic franchise store, one co-branded Cold Stone Creamery store, and one domestic self-serve frozen yogurt café.
Continued store openings should help generate steady growth.
Revenue increased 1.5% last quarter. Over the first nine months of the current fiscal year, operating profit declined by 0.2%.
With a P/E of 13 and a high dividend yield, Rocky Mountain stock is right in the sweet spot for value and income.
Disclosure: The author is personally long DIN.