In general, dividend stocks are associated with blue-chip names that have a low-beta and are worth holding for the long term. However, there are several attractive high dividend small-cap stocks that offer potential for high total returns.
This column focuses on three small-cap stocks with total returns potential of 100% in the next 12 to 18 months. Of the stocks discussed, the first two are trading at a forward price-earnings ratio of less than 10. With strong industry tailwinds, I expect a healthy rally in addition to sustained dividends. Healthy cash flows will also help in improving overall credit metrics.
Further, the third stock discussed has witnessed a deep correction in the last two quarters. The short interest however remains high and I expect a meaningful short squeeze rally to boost total returns.
Let’s discuss the reasons to be bullish on these high dividend small-cap stocks.
Nordic American Tankers (NAT)
Nordic American Tankers (NYSE:NAT) is a quality small-cap stock that pays a healthy dividend and is massively undervalued. Even after a rally of 80% in the last 12 months, NAT stock trades at a forward price-earnings ratio of 5.8. Further, the stock offers a dividend yield of 16.0%. In my view, total returns in the stock can be 100% in the next 12 to 18 months.
As an overview, Nordic American is a tanker company with a fleet of 19 Suezmax tankers. An important point to note is that for Q1 2023, Nordic American reported time charter equivalent rate of $51,902 per day per ship.
For the same period, the company’s operating cost was $8,000 per day per vessel. Therefore, EBITDA margin has been robust and this explains the stock rally. With strong cash flows, dividends are sustainable.
Even if there is a relative decline in time charter rates, the outlook is bullish with the operating cost being low. Nordic will be positioned to deliver healthy cash flows on a sustained basis.
Ardmore Shipping (ASC)
Ardmore Shipping (NYSE:ASC) stock is massively undervalued at a forward price-earnings ratio of 4. Even after a rally of 63% in the last 12 months, I expect the stock to double from current levels. Additionally, ASC stock offers an attractive dividend yield of 6.39%.
Ardmore Shipping is involved in the seaborne transportation of petroleum and chemical products globally. Currently, the company has a fleet of 27 product and chemical tankers with an average age of 8.9 years. Benefiting from higher time charter rates, the company’s cash flows have been robust. This has allowed Ardmore to pay higher dividends and improve its credit metrics.
As of March 2023, Ardmore reported net debt of 20.7%. This provides headroom for potential tanker fleet expansion. It’s also worth noting that the company’s cash breakeven has been declining and stands at $14,500 per day for year-to-date 2023. Therefore, there is ample headroom for positive cash flows.
PetMed Express (PETS)
PetMed Express (NASDAQ:PETS) stock has been in a correction mode with a downside of 23% for the year. PETS stock was overbought, but looks reasonably valued after a deep correction.
The stock offers an attractive dividend yield of 8.38% and is among the top high dividend small-cap stocks to buy. It’s worth noting that even after a meaningful correction, PETS stock has a short interest of nearly 25% of free-float. I would expect a short-squeeze rally.
From a financial perspective, there are two important points to note. First, the company’s free cash flow for the last year was $17.5 million and the company ended Q4 2023 with cash and equivalents of $104.1 million. Financial flexibility remains high for organic and acquisition driven growth.
Further, the company’s AutoShip & Save recurring revenue was the highest ever in fiscal year 2023 at 44%. With new customer addition and upside in recurring revenue, the outlook for cash flows is robust. Therefore, dividends are sustainable and PETS stock can potentially trend higher from oversold levels.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
