You know what my idea of a cool company is? One that doesn't have a line item for cost of goods sold. Oh, and add in one that's got some moderate growth and a rising stock price, and pays a nice dividend.
That's the situation with snoozy clothing licensor Cherokee (NASDAQ:CHKE), a company I added to my portfolio a while back for its bodacious free cash flow, most of which is paid out via a hefty dividend. Cherokee's core customers are firms such as Target (NYSE:TGT) and TJX (NYSE:TJX), who pay Cherokee for the right to use its name brands on products in their stores.
Honestly, I forget to check in on Cherokee a lot of the time, because there's not much news. This month, the company once again declared a $0.60-per-share quarterly dividend, but what recently got my attention was the shares' current price near $40 a pop.
I'm at a loss to explain the stock's recent good fortune. The market moves in fits and surges, and perhaps others are finally catching on to the allure of owning a 6% yielder that's growing, albeit slowly.
I've gotten some Foolish feedback from readers who wondered whether the firm wasn't paying out too much of its cash. A quick check of the financials for the trailing 12 months shows that Cherokee is indeed shedding a lot of its cash. Cash from operations totaled $18 million and $17.9 million was paid out as dividends.
That might alarm some folks, but keep in mind that Cherokee's operations are very light, yielding a trailing-12-month net margin of 43%. With stable but subdued revenue growth of about 9%, I'd like to see a bit more leverage from flattening SG&A expenses. My numbers show operating and net margins actually slimming, if slightly, over last year's comparable quarters. But unless Cherokee begins paying out more than it's taking in -- something I doubt will happen -- I'll be holding the line on this one. There's a place in my portfolio for values and growers, and this is one of my steady Freddies.
If this company were bigger, I'm sure Mathew Emmert, my cash-loving colleague at Motley Fool Income Investor, would be taking a closer look. As it is, he stalks bigger game, such as Tupperware (NYSE:TUP) or Duke Energy (NYSE:DUK). For my part, Cherokee seems to present better-than-average prospects for capital gains atop the tasty dividend. The firm is known to be looking at the fabled "strategic alternatives," and there's plenty of private money out there looking for decent businesses. Cherokee is that and more. Investors who like the opportunity for two kinds of investment returns would do well to watch the shares.
For related Foolishness:
- A Small Cap for the Long Run
- Cherokee Shows You the Money
- An Investment Idea in Your Pants
- Talk the biz with Cherokee Group CFO Russell Riopelle.
Seth Jayson likes his cash and likes stocks that give him more of it. At the time of publication, he had shares of Cherokee but no positions in any other firm mentioned. View his stock holdings and Fool profile here. Tupperware and Duke Energy are Income Investor recommendations. Fool rules are here.
