A Small Cap Stock That Pays Big Dividends

Who knew that there was money in trash? Chances are good that you have never heard of US Ecology (ECOL). US Ecology is a small cap waste management company that disposes of radioactive and hazardous waste materials.  The company has been around providing its waste treatment services since 1952. US Ecology has a market cap of $240 million dollars and an enterprise value of $207 million dollars.

US Ecology has a solid balance sheet for a small cap stock. The company has $32 million dollars in cash and has just $15,000 in long term debt. US Ecology generates nearly $30 million dollars in free cash flow. The company has a profit margin of 10.8% and an operating margin of 17.4%. The company has a return on equity of 11.8% and an 8.6% return on assets.

The company was affected by the economic recession and the expiration of a large Honeywell contract. The Honeywell project contributed nearly 10 cents to the company’s bottom line. The company saw revenues drop from $175 million dollars to $132million dollars from 2008 to 2009. Sales have declined 6.6% over the past years.  Earnings declined 34% over the last quarter. There is however good news for the company. Sales are projected to grow for the first time in awhile. Sales growth is estimated at 33% for the current quarter. The company has seen 7% sequential growth in its base business.

Shares are valued pretty reasonably. The stock currently trades at 22 times the current year’s earnings. This is higher than industry competitors whose stocks trade at a P/E ratio in the mid teens. That’s not a high P/E ratio for a stock with an expected growth rate of 20% over the next five years. AT $13.20 per share, the company trades at a price to earnings growth of 1. The stock trades at 2.3 times sales and 2.6 times book value.

US Ecology has fallen into the range of a high yielder. The stock is barely above its 52 week low of $12.98. The company pays a 72 cent dividend which is a 5.5% dividend yield. The current yield is substantially higher than its 5 year average dividend yield of 3.6%. The only concern would be the dividend payout rate. The current dividend payout rate is 118% of this year’s projected earnings and 100% of next year’s earnings. This is obviously unsustainable. Either the company will have to meet its 20% growth rate forecast or will have to cut its dividend.

While I like the long term growth prospects of US Ecology, a dividend cut does appear more and more likely.