What's a cash-rich small-cap with a great balance sheet to do with all of its liquidity? One option is to return some of that cash to shareholders via dividends and/or stock buybacks.
Two recent examples of companies that have done so are Benchmark Electronics (BHE) and Kulicke and Soffa (KLIC) . They both have also met my stringent definition of a "double net" -- a company trading at between one and two times net current asset value. In fact, both were constituents of my 2017 Double Net Value Portfolio, and I included BHE in my 2018 version of the portfolio as well.
Additionally, I've mentioned both companies as potential takeover candidates in the past. I've found that double nets have been very fertile ground for such activity, due to their typically solid balance sheets and often-ample liquidity.
BHE declared its first quarterly dividend (15 cents) back in March, along with the expansion its stock repurchase program by $250 million. The company also reduced shares outstanding by nearly 1 million shares in the first quarter. BHE currently trades at just 1.91x net current asset value, and ended the first quarter with $676 million, or nearly $14 per share, in cash and just $207 million in debt. It currently yields 2% and trades at 17x next year's consensus earnings estimates.
KLIC declared its first quarterly dividend (12 cents) on June 12 and currently yields 1.98%. The company ended its latest quarter with $628 million, or nearly $9 per share, in cash and short-term investments. While no longer a "double net," KLIC still trades cheaply relative to net current assets at 2.47x. It also trades at just 11x next year's consensus earnings estimates. The company, which has bought back stock in the past, also established a new $100 million stock repurchase program last August and has reduced shares outstanding by about 700,000 since then.
Hopefully, both companies will continue to buy back stock and have the wherewithal to increase their dividends. Despite the unpopularity with some in the industry of that combination (buybacks and dividend growth), I've found it to be a potentially powerful way to create shareholder value.
Now, the last "double net" that initiated a dividend was boating retailer West Marine, which surprisingly did so in early 2017. But West Marine didn't have the level of liquidity and resources that BHE or KLIC do, and it was in the ever-difficult retail industry. Still, the company was acquired within three months of starting the dividend.
Of course, I'm not insinuating that initiating a dividend makes a company more attractive for a takeover. If anything, the contrary is true.
(This column has been updated.)
