Small-Cap With A Double Digit Yield

In a market where positive returns could be fleeting due to abnormal volatility, stocks offering high yields can be very attractive options given that they guarantee returns and often help to smooth portfolio volatility.

Some of the best candidates that fit this bill are TC Energy (TRP) and Enbridge (ENB), and ideally one wants to hunt for low beta names that also pay 5.0%+ dividend yields to fortress a portfolio and diversify higher-beta growth.

However, sometimes the best yields are available only in the small-cap space and it’s rare that investors find low beta when it comes to sub $1.0 billion market cap names.

This creates a higher risk, and especially when investors are buying small-cap names that are in multi-year uptrends and in the later innings of their cycles that could be prone to violent corrections.

Inversely, in the case of turnaround stories with high yields, one can’t take the volatility out of the equation, but they can at least build in a margin of safety from a valuation standpoint.

In this update, we’ll look at one small-cap name paying a ~14.5% dividend yield that has only just begun a new multi-year uptrend and is seeing positive revisions to earnings estimates.

Double-Digit Yield At A Reasonable Price

Spok Holdings (SPOK) is a $170 million market cap company in the healthcare communications space that is a long-standing customer with customers that include 18 of the top 20 adult hospitals and the US News and World Report’s top-10 children’s hospitals.

Some of its customers include Boston’s Children Hospital, the Mayo Clinic in Rochester, the Cleveland Clinic, and the Texas Children’s Hospital.

The company is the largest paging carrier in the United States with over 800,000 pagers, and it has 50% market share of hospitals with 600+ beds, or a total of ~24% market penetration.

The company’s Care Connect enhances clinical workflows and improves patient care with incident management, facility alarms, clinical alerts, test results, encrypted paging, secure texting, on-call scheduling, EHR integration, and many more services.

This makes Spok’s service sticky given that it’s unified communication platform, connecting all departments and letting doctors focus on what’s important without disruption: their patients.

Unfortunately, while the company has seen declining revenue since FY2016, in addition to declining gross margins which can be a lethal combination.

However, the company has a strong balance sheet with $35 million in cash and no debt, and it’s finally adopted a new model aimed at cost savings plus new product releases, with the company thus far improving its margins and reducing churn.

This restructuring and severance resulted in one-time costs of $15.8 million year-to-date, but the company is emerging stronger and is expected to see annual EPS increase from $0.51 in FY2022 to $0.82 in FY2023 thanks to streamlining its business and focusing on cost-cutting where possible.

Just as importantly, the company is returning a significant amount of capital to shareholders as part of this turnaround, putting in place a $0.3125 quarterly dividend.

The Fundamental Case

Spok Holdings might look expensive at 10.4x forward earnings given that it’s a low to no-growth company from a sales standpoint, but it’s important to note that this meaningful margin expansion is growing earnings even if revenue has been stagnant.

It’s also worth noting that the company has nearly $2.00 in cash per share based on its 19 million shares, meaning it’s trading at just ~8.0x earnings on an enterprise value basis, a much cheaper valuation.

Meanwhile, the improved profitability metrics are allowing Spok to invest in its legacy products which should help the company return to growth post-2024 and drive future sales and upgrade opportunities.

So, although the business may be stagnant due to under-investment, this looks set to change which could drive future earnings growth.

To summarize, although rear-view mirror analysis might suggest this is a struggling business, its overdue pivot to cut costs and generously return significant capital to shareholders while re-investing has turned Spok from an “Avoid” to a more interesting story.

The Technical Picture

Moving to the technical picture, SPOK has one of the more attractive setups within the US Market, currently in the process of breaking out of a tight 3-month base built between $7.50 and $8.50.

This base has been built atop rising 100-day and 200-day moving averages and the base-building period was quite healthy for the stock as it has allowed the moving averages to catch up to price.

Meanwhile, there is no real resistance overhead until the $9.60 area, and the stock has seen strong closes on any pullbacks to the bottom of its base, suggesting the stock is potentially under accumulation.

See the Full Technical Analysis Report for SPOK

This pullback came back to the important 38% retracement level for the stock, a logical area for strong stocks to find support and then resume their uptrends.

So, with earnings on deck on Friday, the stock having one of the better charts in the market with a recent breakout, and this breakout being on above-average volume, I am cautiously optimistic about SPOK’s upcoming earnings report, and would not be surprised to see higher prices ahead.

However, even if the stock does languish, investors are locking in a 14% dividend yield at current prices.

The Bottom Line

Based on what I believe to be a conservative earnings multiple of 12.5 (10-year average 13.9), and FY2023 annual EPS estimates of $0.82, I see a fair value for Spok Holdings of $10.25.

Although this only represents only 19% upside from current levels, the return is significantly higher on a total return basis, and much of this return is guaranteed, with the company paying an annualized dividend of $1.25.

This translates to a 34% upside from current levels, which is a very attractive upside case, especially given that estimates of $0.82 look like they could be conservative given that the company remains in the process of a turnaround.

So, with one of the highest yields of any small-cap name and an improving earnings trend, I would view any weakness in SPOK as a buying opportunity.

Disclosure: I am long SPOK

The above analysis of Spok Holdings (SPOK) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Is Spok Holdings (SPOK) A Buy or Sell?

Based on MarketClub’s technical analysis tools, Spok Holdings (SPOK) is in a strong uptrend that is likely to continue. With short-term, intermediate, and long-term bullish momentum, SPOK continues to climb. Traders should protect gains and look for a change in score to suggest a slow down in momentum.

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