There are a limited number of ways a company can use the cash that it generates.
First, it can reinvest it back in the business in order to grow the business. This is a god idea if each dollar reinvested can return meaningfully more than one dollar in value for shareholders.
Second, a company can pay down its debt. This is a good idea if the interest rate on its debt is higher than the company could expect to get by reinvesting the money in the business, or if debt is becoming too high.
Third, the company can use its cash to acquire other, complementary businesses. This is a good idea if there are genuine synergies between the businesses that mean the return on the cash used to acquire other businesses is beneficial for shareholders.
Lastly, a company can return cash to shareholders if it cannot use it in a manner that generates sufficient returns. As such, small cap companies who are in growth phases might generally be dissuaded from paying out large percentages of their earnings to shareholders. However, this is not always the case.
Here are three quality small-cap companies, which have the cash to pay a good dividend to shareholders.
Servcorp Limited (ASX: SRV)
Servcorp provides executive services and virtual offices, as well as IT, communication and secretarial services worldwide. Servcorp paid a dividend of 26 cents in 2017 at a payout ratio of 63%. At the current share price, that represents a return of 5.4%. Analysts have forecast a dividend of 26 cents again in 2018.
OFX Group Ltd (ASX: OFX)
OFX Group offer international payment and foreign exchange services. Last year, it paid a dividend of 5.7 cents per share, a return of 3.7% at the current share price and a payout ratio of 71%. Analysts have forecast a dividend of 6 cents in 2018, a return of 3.9% if you buy the shares today.
APN Outdoor Group Ltd (ASX: APO)
APN Outdoor is an outdoor advertising company that operates in Australia and New Zealand. It offers advertising via digital and static billboards, as well as transit, rail, and airport advertising. Its 2017 dividend was 19.2 cents, representing a 4.6% return at the current share price. To achieve this, its payout ratio was 64%. Analysts have forecast a dividend of approximately 19 cents again in 2018.
Foolish takeaway
Small caps don't always retain their earnings for the purposes of growth. Servcorp, OFX Group and APN Outdoor are small cap companies that earn good cash profits and can pay a good percentage of these out to shareholders.
