Investors often don't associate dividends with smaller companies, especially those that are out of favor, that operate in out-of-favor industries, or that are perceived as struggling. We certainly take notice when a company cuts or eliminates a dividend; that is usually a bad sign, and stocks suffer the consequences as investors flee. That's why it is not in a company's best interest to initiate a dividend that it cannot afford. Dividends cannot be faked the way stock buyback programs sometimes can be (not that companies announce buyback programs and then never follow through, mind you).
That's why I took notice recently when specialty boating retailer West Marine (WMAR) , a double-net company -- that is, a company trading at between 1x and 2x net current asset value -- initiated a five-cent quarterly dividend. The payout equates to a decent 2.1% indicated dividend yield. To say I was surprised by this move is an understatement.
I've never seen such a small name that is so deep into value territory begin paying a dividend. West Marine certainly has the cash to do so; it ended last quarter with $76.1 million, or just over $3 per share, in cash. It does not hurt matters that the balance sheet is clean, with no debt. Shares trade at just 0.76x tangible book value per share. In addition, WMAR has demonstrated the ability to generate free cash flow, including $1.07 per share in 2016.
In a very competitive market, WMAR has been altering its business, pushing into e-commerce, with a goal of making that means of selling 15% of total revenue by 2019. Progress has been made here; in 2016 e-commerce represented 11.4% of revenue, up nearly 20% from 2015. Still, West Marine shares have languished over the years and have traded in a fairly tight range since 2010. Investors simply have not been rewarded for owning this stock.
The dividend, however, potentially brings with it a new level of excitement for WMAR, although the response since the March 24 announcement has been tepid. Initiating this dividend, which will require about $5 million per year for the company to cover, suggests a level of confidence in the business by management. It would be unwise, as I noted above, to start returning cash to shareholders if management doesn't believe it can afford the payout over the long haul. You fake this at your own peril.
The thing that would put more teeth in this move, in terms of displaying confidence, would be if West Marine also started buying back stock. That would send an even stronger signal to the markets. Controversial as the idea might be, I find the combination of dividends (especially growing dividends) and stock buybacks to be potentially powerful, but one step at a time here.