It will come as no secret that the pool of attractive safe and cheap stocks is becoming pretty shallow. We have had five years of straight-up action and have just reeled off six consecutive quarters of positive returns. That's the longest run of quarterly advances in 16 years. The continued advance continues to push most stocks well above levels that would be considered safe and cheap. Even more difficult is finding safe and cheap stocks that pay a dividend. Here in the US I found just 27 stocks that pass through the filters of balance sheet safety and trading below book value.
The majority of them are Mortgage REITs and Business Development Companies. Just two stocks pass through all the criteria, pay a dividend, are over $100 million in market cap and are actually operating businesses. If you do not already own shares of Rowan (RDC) and Richardson Electronics (RELL) you should consider picking some up on the next down day in the stock market.
This morning I decided to cast my net outside the United States and see if I could find any safe and cheap dividend payers. We didn't do a lot better around the globe, as just 23 names made the safe and cheap dividend payers list. There are a couple of stocks worth considering by long-term value-oriented investors.
TAT Technologies (TATT) is an Israeli company that makes things like heat transfer systems for military commercial and business aircraft and provides maintenance and repair operations to airlines, air cargo carriers, maintenance service centers and the military. FMI Opportunity Fund took control of the company last year and has been taking steps to improve the business and build shareholder value. The balance sheet is solid, with a debt-to-equity ratio of just 0.01 and a current ratio over 5. The stock is certainly cheap as it is trading at just 75% of book value right now. The company pays an annual dividend and is currently yielding 3.14%. Unfortunately, they already made the 2014 payment, so you will have to wait about nine months to get another payout from TAT Technologies.
AuRico Gold (AUQ) also makes the safe and cheap dividend stock list. It is hard to think of a gold miner as cheap, given the volatility in the sector, but based on the balance sheet the company qualifies. As I have said in the past, I have no opinion on gold prices except that at some point in the next five-plus years the metal market will have an explosive rally and the miners will trade for many multiples of the current stock prices. AuRico announced a new dividend policy for 2014, under which the dividend will be linked to operating cash flow. They will pay out 20% of the operating cash flow generated in the preceding quarter. As of today that policy results in a yield of 1.88%. When gold prices and profits do go higher, that should increase. The company has a debt-to-equity ratio of 0.28 and a current ratio of 3.50. At less than 70% of book value the stock is priced at bargain levels.
Nordic American Tankers (NAT) also makes the grade as a safe and cheap income stock. I have been bullish on shipping since last year and continue to be fairly positive in the sector. Bermuda-based Nordic Tankers owns 22 Suezmax vessels and has seen strong growth in its earnings and revenues this year. In its most recent earnings report, the company's management explained its policy to win under any conditions in the tanker market: "our objective is to have a strategy that is flexible and has benefits in both a strong tanker market and a weak one." If shipping rates remain low, Nordic Tankers is financially positioned to buy tankers on the cheap. If the market improves, higher earnings and dividends can be expected. The stock is trading at 84% of book value and the balance sheet is solid. The debt-to-equity ratio is just 0.29 and the current ratio is 5.6. At today's price, shares of Nordic American are yielding 9.65%.
Expanding the search for value situations abroad can help find additional safe and cheap opportunities. Although we only expand our list of value income stocks a little, every little bit helps in a market where bargains are scarce.
