Small-Cap Richardson Electronics Electrifies The Market Richardson Electronics has been riding a wave of good news that just keeps getting better. The company's revenue and earnings have been reinvigorated by strengthening trends within the global economy...

Plug Richardson Electronics Into Your Small-Cap Portfolio

Richardson Electronics (NASDAQ: RELL) has been riding a wave of good news that just keeps getting better. The company's revenue and earnings have been reinvigorated by strengthening trends within the global economy and promise to keep it operating profitably for many years into the future. Better, the company's fiscal Q1 results bring the dividend metrics back into line and attractive to us. If you are looking for a small-cap dividend payer with a stable distribution and positive outlook for distribution growth this could be the stock for you.

Richardson Electronics Has Blowout Quarter

Richardson Electronics is a microcap electronics company perfectly positioned for today's technology needs. The company operates in three segments that include RF and microwave technology, specialty display needs (screens, etc), and the healthcare business. The company's $52.7 million in net revenue is a drop in the bucket for its larger competitors but a robust 38.4% better than last year. Last year's comp is fairly easy but two-year growth is still strong at 6.4% and expected to get stronger over the next year. Strength was seen in all three segments with notable callouts for the PMT segment (RF and microwave) and the Electric Tube business, and the Health segment which are up 42.2%, 26%, and 22% over last year. Also of note, strength within the Semiconductor Wafer Fabrication unit, surprise surprise.

Moving down the report, there was some margin contraction but not for reasons you might think. While inflationary pressures are having an impact margin contraction is due more to product mix shifts and to a lesser degree rising freight costs than anything else. The gross margin shrank 150 basis points and the operating expenses climbed 38% but the bottom line earnings were still strong. The $0.20 in GAAP earnings reverses and $0.09 loss in the previous quarter and sets the company up for positive cash flow in fiscal 2022. The company did not give any formal guidance but did mention record backlogs in 3 key product lines.

"Our strong first quarter performance is a result of growth initiatives that are starting to take hold and we successfully navigated unprecedented global supply chain and logistics challenges. The first quarter also ended with record backlogs of the ULTRA3000 Pitch Energy Modules for GE Wind Turbines, microwave products and Canvys monitors. As a result, we believe fiscal year 2022 will be a strong year of sales growth and improved profitability," said Edward J. Richardson, Chairman, Chief Executive Officer, and President

Richardson Electronics Dividend Safety Stabilizes

Richardson Electronics pays an attractive 2.4% yield but there is a caveat. While the company did not cut or suspend the payout during the pandemic it was a little touchy for a while, at least from the investor perspective. Marketbeat.com indicates the payout ratio relative to fiscal 2021 earnings was well over 100% and put pressure on the balance sheet. The balance sheet is still a fortress, however, with the company net cash and only very lightly levered. Looking forward, we are expecting the company to post earnings in the range of $0.50 to $0.80 which puts the payout ratio in the range of 50% to 30%.

The Technical Outlook: Richardson Electronics Breaks Out

Shares of Richardson Electronics have been trending higher nearly all year and are breaking out to a new high in the wake of the Q1 report. Price action is up more than 3.0% in premarket action and trading at the $10.40 level or the highest level seen since mid-2018. Assuming upward momentum continues we see this stock gaining 40% to 50% by the end of the year.