The Rare 33% Dividend Grower Thursday, November 21, 2013
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When a stock increases its dividend, it's only a matter of time before the share price jumps. One overlooked Canadian dividend stock is raising its dividend by 33%. Thanks to the small size of this stock, most investors didn't even notice.
This creates a big profit opportunity for investors. And as I'll tell you today, I think this company could raise its dividend considerably higher in the next year.
The company is called Supremex (Toronto: SXP), Canada's leading maker of envelopes and labels. Earlier this month, management announced plans to increase the quarterly dividend by one penny per share. To collect the next dividend, you must own the stock by Nov. 30.
With a 16-cent annual dividend, Supremex offers a dividend yield of 7.6%. That's healthy compared with the 2.5% yield from 10-year U.S. Treasury bonds and a 2% dividend yield from the S&P 500.
Supremex may sound familiar. That's because I recommended the stock to Income & Prosperity readers on Sept. 20. At the time, the stock traded at $1.84. Not only has the stock risen 14% since that recommendation, but the dividend has also grown considerably.
I love investing in dividend growers. That's because the stock price is highly correlated with dividend growth. For example, a company that raises its dividend by 10% per year will typically see its shares appreciate at a similar pace.
The recent dividend increase from Supremex is significant. But I think more dividend hikes could be ahead. Let me explain...
The largest shareholder of Supremex is a $125 million investment holding company called Clarke Inc. (Toronto: CKI). It owns a 45% stake.
Earlier this year, Clarke made an offer to buy the rest of the company. But the directors of both companies were unable to agree on price. And in August, the discussions were called off. But Clarke remains a major shareholder that's looking for ways to unlock value from its investment in Supremex.
The best way is through bigger dividend payments. That one-cent dividend increase will put an extra $522,000 in Clarke's bank account every year.
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Clarke has a history of advocating for much bigger dividends. In the first nine months of 2013, Clarke has increased its own dividend payments by 300% - from 6 cents a share to 24 cents a share.
The investment firm has also successfully advocated for dividend hikes at two of its major holdings: Bonnett's Energy and TerraVest. After each of these dividend increases, the share price has jumped.
A History of Bigger Dividends
The dividend increase at Supremex is a good start. But it appears that Clarke could be pushing the Supremex board of directors for even bigger dividends in the coming quarters.
With a market capitalization of just $60 million, Supremex is a tiny company. Even after the recent dividend increase, the company is only paying out around 30% of its free cash flow to shareholders. That means that there is a considerable opportunity to increase the dividend payments.
One well-regarded Canadian investor named Guy Gottfried thinks that Supremex could increase its annual dividend to 24 cents per share. If that happened, the stock would yield 11.4% based on its current share price.
The bottom line is that Supremex has lots of cash flow and the financial means to pay much bigger dividends. With major shareholder Clarke advocating for bigger dividends, the one-cent increase earlier this month could just be the start.
Supremex shares rose 8% after the recent dividend increase. But a bigger move for the stock is likely to happen after a considerable dividend hike. The time to buy this stock is before that happens.
I'll remind you that shares of Supremex are extremely illiquid. Yesterday, just 5,300 shares traded on the Toronto Stock Exchange (Note - the stock also trades on the OTC exchange in the U.S. with the ticker symbol SUMFX). I highly recommend using limit orders when buying or selling shares of thinly traded stocks like Supremex.
Do you like hearing about small and unknown dividend stocks like Supremex? Please send me an email and let me know what you think. I'm always looking for feedback and suggestions from Income & Prosperity readers. My email is firstname.lastname@example.org
Full Disclosure: I personally own shares of Supremex, and intend to buy more stock.
When Guy Gottfried takes the podium in front of the world's best value investors, you know something big is about to happen.
Over the past few years, Mr. Gottfried has attained a cult-like following only rivaled by legends like Warren Buffett. That's because he has an uncanny knack for finding DEEP value stocks right before they take off...
The last four times he addressed attendees of the Value Investing Congress, you could have made an average of 67% by just by buying his recommended stocks. One is his latest recommendations is Supremex. Click here for the full story.
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