This Microcap Stock Has a Sweet 4.5% Dividend Yield

The term microcap refers to a U.S. stock with a market capitalization less than $300 million. These are among the smallest publicly traded companies throughout the entire stock market. Many investors tend to dismiss these stocks are being too volatile and speculative.
But sometimes, there are microcaps that are just as deserving of attention as their large-cap peers. Many microcap companies have strong business models, profitability and attractive dividend yields, just like large-caps. The added kicker is that the smaller the company, the higher the growth potential in some cases.
Rocky Mountain Chocolate Factory (NASDAQ: RMCF) is a microcap stock with a $60 million market cap. That means it likely flies under the radar of most investors. However, it has all the qualities mentioned above – and a 4.5% dividend to boot.

The Stability of a Large-Cap Stock

One of the best aspects of Rocky Mountain Chocolate’s business model is that is involved in consumer goods. This is not some speculative tech startup that might not be here in a few years’ time. Instead, it’s is a purveyor of confectionery products, including clusters, caramels, creams, mints and truffles. It also offers other products that are prepared in individual stores, such as fudge, ice cream and coffee.
Its high-quality, popular products have served the company well. Sales grew each year from 2011-2015, increasing 33% during that time. And the company raked in a healthy $5.2 million of free cash flow last year.
Rocky Mountain Chocolate also has a strong balance sheet. At the end of the last fiscal year, the company held $7.1 million in cash on the books – amounting to approximately 11% of its market capitalization. Plus, its long-term debt-to-equity ratio is a very healthy 25%.
Rocky Mountain Chocolate is a tiny company now, but it has a lot of growth potential. It operates just 595 Rocky Mountain Chocolate Factory and self-serve frozen yogurt stores in 41 states in the U.S., but it also has stores in international markets like Canada, Japan, Turkey, Pakistan and Saudi Arabia.
It’s a great sign that the company has already established a precedent for international growth, which will make further expansion easier. Just 3% of its annual sales come from international markets, so clearly there is lots of room for continued growth.

A Tasty Dividend

In addition to its rock-solid business model and steady profitability, another great thing about Rocky Mountain Chocolate Factory is its dividend. Over the past five years, it has raised its dividend by 4% compounded annually. This has pushed up its dividend yield to a tasty 4.5%, which is very attractive given the current low level of interest rates.
And because it deals in a fairly recession-resistant product, Rocky Mountain Chocolate’s dividend has stood the test of time. The company has declared uninterrupted dividend payments for 50 quarters in a row – a stream lasting more than 12 consecutive years.
Rocky Mountain Chocolate’s dividend looks to be very secure. The payout ratio, as a percentage of free cash flow, was just 51% last year. That is a testament to the strength of the business model. The company’s prodigious free cash flow generation provides more than enough cash to sustain its hefty dividend and invest sufficiently to grow the business.

A Rich Industry

Americans eat a lot of chocolate. According to Rocky Mountain Chocolate, the total U.S. candy market generated approximated $33.6 billion of retail sales in 2013, with chocolate accounting for sales of approximately $20.6 billion. According to the Department of Commerce, per capita consumption of chocolate in 2010 was approximately 14 pounds per year nationally.
With its strong brand, high dividend yield and solid growth prospects, Rocky Mountain Chocolate Factory stock could be a very sweet buying opportunity.
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