QAD: A Big Little Company

Dividend talk at The Fool generally focuses on large, established companies with steady free cash flows and limited avenues for excess cash beyond returning it directly to shareholders.

A perfect example might be mailing equipment company (and Motley Fool Income Investor holding) Pitney Bowes (NYSE: PBI  ) , which we profiled in October. You could also look at Microsoft (Nasdaq: MSFT  ) , which Bill Mann said in February should boost its payout. Or maybe Best Buy (NYSE: BBY  ) , which recently started doling out dollars.

Yesterday we got a look at dividends from a somewhat different angle, as shares of QAD (Nasdaq: QADI  ) jumped more than 17% on the company's announcement that it would pay investors a one-time dividend of a dime per share on Aug. 10, initiate a small quarterly cash dividend, initiate a dividend reinvestment plan, and buy back shares. Those are all big-company behaviors -- and yet QAD's market capitalization, at below $400 million, is far less than any of the three previously mentioned companies. (Pitney Bowes is the "smallest," at a paltry $10 billion and change.)

QAD, which makes software that manufacturers use to manage their work processes, would tell you not to be taken in by those numbers. With more than 5,200 customers as of Jan. 31 -- a roster in its 10-K is a who's who that includes Johnson & Johnson (NYSE: JNJ  ) , Coca-Cola (NYSE: KO  ) , and General Electric (NYSE: GE  ) -- its revenue is well distributed. No single customer accounts for more than 10% of sales.

QAD isn't putting up booming income statement numbers -- in fact it has been regularly unprofitable, finally turning in net profits last year after a long period in the red. With most recent orders coming in at less than $1 million, that's not likely to change. (QAD concentrates heavily on increasing revenue from existing customers.) But the balance sheet is strong, and the company turns in steady free cash flows.

All told, QAD bears many of the appealing financial dynamics that attract investors to software companies -- like gross margins north of 60% -- without many of the headaches its smaller, "high-growth" counterparts bemoan. Judging by the response to yesterday's news, it's a risk/reward tradeoff many investors are willing to accept.

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Fool contributor Dave Marino-Nachison owns shares of General Electric.