Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, I want to highlight a relatively unknown maker of passive electronic components, AVX (NYSE:AVX).
One passively aggressive company
One of my favorite aspects of working for The Motley Fool is the "motley" of opinions you'll get when discussing a particular stock, or group of stocks. As a community, we can collectively use our knowledge and expertise to examine a company or a sector from multiple angles that you just won't get anywhere else.
One company, in particular, that caught my fancy years ago, which Foolish co-founder Tom Gardner reminded me of last December, is AVX, a manufacturer of passive electronic components. These components, most often capacitors and RF modules, are often used within mainframes in the telecommunications, information technology, automotive, and medical industry.
AVX is majority-owned by Japan's Kyocera (NYSE:KYO) and holds distribution and resale agreements with Kyocera that make up a third of its revenue. The remainder of AVX's revenue, and the bread and butter of its future growth, lies in its ceramic, tantalum, and passive electronic components division.
As you might imagine, AVX and its closest rivals, KEMET (NYSE:KEM) and Vishay Intertechnology (NYSE:VSH), are highly dependent on the tech cycle and a growing economy to drive growth. Weakness in mainframe and computing solutions spending can have negative repercussions throughout the capacitor sector. Keeping an eye on sales patterns at Arrow Electronics (NYSE:ARW), for instance, a computer hardware wholesaler and one of AVX's largest customers, can go a long way to determining the health of the sector.
AVX hasn't been without its fair share of ups and downs, as is evidenced by the whopping $366.3 million settlement payment to the Environmental Protection Agency agreed upon earlier this month; but plenty of other catalysts loom large to send this company higher.
A Foolish co-founders' wise words
Tom Gardner definitely didn't say it in as many words as I am here, but his CAPS pitch reads as follows:
Strong financials. Dividend payor[sic]. Serving growing markets. Well managed. Double-digit ROE. Tough year for the stock renders it cheap for long-term investors.
AVX's strong financials are definitely a reason why I like the company. AVX has been profitable on an annual basis since 2004, which is remarkable given how steep of a recession we suffered through in 2009, and has produced positive free cash flow in each year over the past decade. It's led by John Gilbertson, who has been its CEO since July 2001, and its President since 1997. As I've often opined, long-tenured CEOs often form cohesive management teams that usually lead to good operational performance.
AVX is also executing where it counts. It recently announced the acquisition of the tantalum components division from Nichicon Corp. for $86 million, which will expand its automotive components reach in Asia -- a relatively untapped automotive market. Nearly all of AVX's strategic moves involve reducing its costs in emerging markets, while also expanding its manufacturing capabilities.
A strong case can also be made for the entire capacitor sector as a value play. Vishay, KEMET, and AVX are all trading well below their book values; however, AVX's balance sheet easily separates it from the pack. Whereas KEMET's boasts $173 million in net debt, and Vishay has a healthy $486 million in net cash, AVX reigns supreme with $837 million in cash and zero debt! In other words, AVX's cash balance makes up more than half of its current value.
Can't contain this dividend
Then, of course, we have AVX's all-important dividend. Unlike some of the previously highlighted names in this series, AVX doesn't have any rhyme or reason when it comes to why or when it'll raise its dividend. It does, however, have a lot of investors excited by how rapidly that dividend has been rising in recent years.
As you can see, AVX's quarterly payout has doubled to $0.075 from $0.0375 in just five years, yet its payout ratio, based on Wall Street's consensus EPS for 2013, is a manageable 44%. In total, AVX is rewarding shareholders with a handsome 3.1% yield.
Just as Tom Gardner pointed out, AVX offers a very strong balance sheet and a minuscule forward P/E, despite being priced well below its book value. AVX has a cohesive management team that has the company poised to succeed overseas, while also rewarding its shareholders in the process through prudent fiscal management, accretive acquisitions, and steady or rising dividends. AVX may not be a company you often think of when it comes to paying out a healthy dividend, but it should be!
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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