In the realm of income investing, the bulk of the attention typically gets paid to the most famous large-cap dividend stocks. But for investors hungry for yield, venturing into the world of small caps can be very worthwhile. There are plenty of small caps that offer solid dividend yields backed by strong cash flow.
In that light, I would highlight PetMed Express (NASDAQ:PETS) as an attractive stock for income investors. PetMed Express is a marketer of prescription and non-prescription pet medications, health products, and supplies for dogs and cats. The company, a licensed pharmacy, operates through the 1-800-PetMeds brand and dispenses prescription medications in all 50 states. It offers over 3,000 different products, including a variety of private label products. According to the company, it's the largest pet pharmacy in the U.S.
For income investors, PetMed Express is a compelling pick, sporting a high dividend yield and a strong balance sheet, and operating in a booming industry.
High yield, strong financial position
PetMed Express probably flies under the radar for most investors, and for good reason: The stock has just a $300 million market capitalization. But this doesn't mean it has nothing to offer. Quite the contrary -- this stock might be a great addition to an income investor's portfolio.
At $15 per share, PetMed Express yields approximately 4.5%. This is a very strong yield considering the current low-interest rate environment, and the fact that the S&P 500 average dividend yield is only about 2%. And, importantly, PetMed Express' dividend is backed up with a very profitable business.
PetMed Express generated $29.1 million in free cash flow in the last three quarters of the current fiscal year. In the same period, the company's 4.5% dividend cost just $10.3 million in cash. This equates to a very comfortable 35% free cash flow payout ratio.
PetMed Express also has a strong balance sheet. The company holds $52.6 million in cash and short-term investments on its balance sheet, compared to just $6.2 million in total debt, with no long-term debt.
The advantage of a booming industry
The reason PetMed Express is doing so well is primarily because it operates in a highly lucrative industry. Pet healthcare is booming in the United States. The Bureau of Labor Statistics conducted a study on pet spending in the U.S. from 2007-2011, and it found that there are about 218 million pets in the United States. Apparently, all those pets are very well taken care of by their owners; according to the study, spending on pet care grew to $61 billion by 2011, and it stands to reason it's grown since then. In 2011, the average U.S. household spent just more than $500 on pets.
The bulk of the pet care industry is dominated by the retail giants like Wal-Mart, but that doesn't mean PetMed Express isn't also successful. There's plenty of spending to go around. This is particularly true when it comes to online sales, which is where PetMed Express stands to see the highest growth. Online sales for the fiscal year were approximately 79% of all sales compared to 77% for the prior fiscal year, which resulted in online sale growth of 4%. Continuing to shift focus to online sales should keep revenue growth intact.
Growth investors, look elsewhere
As with most stocks, PetMeds Express isn't an ideal pick for every investor. Growth investors aren't likely to find much to like. PetMeds operates a strong business, but it's only grown sales by about 1% per year during the past five years. This is due to intense competition in the space from the likes of Wal-Mart and other retailing giants. But while the stock likely isn't attractive to growth investors, its high dividend is secured by lots of free cash flow, which makes it very worthwhile for income investors. PetMeds Express won't offer a lot of growth, but its 4.5% dividend yield and strong balance sheet are rare finds.
Because of these qualities, income investors shouldn't let this small cap continue flying under the radar.
Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.