By Karen Talley
Dow Jones Newswires
NEW YORK -- Hopes for small stocks to resume their mantle as market-outperformers may be set back by President Bush's plan to end personal income taxes on dividends.
The proposal "appears to be a con to our smaller-is-better thesis," said Steve DeSanctis, head of small-cap research at Prudential Securities. That is because most small stocks don't pay dividends -- feeling it is more important to put the money they do make back into operations to aid much-desired growth.
The concern is that the Bush plan will then steer investors more toward the large-cap market, where dividends are much more abundant.
More than half the companies in the Russell 1000 Index of large-cap companies pay dividends, while just a third of those in the Russell 2000 Index of small caps do. The average yield for the Russell 1000 is also higher, at 1.72%, compared with 1.4% for the small-cap index.
That isn't to say small caps completely lack dividend oomph. And based on the premise that "generous dividend payers could see a boost" if the tax law is changed, Mr. DeSanctis sees a number of opportunities for investors.
The top five Russell 2000 dividend payers are small-business investor MCG Capital, with a 15% yield; buyout firm AM Capital Strategies, 14% ; utility Northwestern (NYSE), 13%; electricity and gas distributor Vector Group (NYSE), 12%; and utility Westar Energy (NYSE), 12%.
Small caps that have demonstrated a propensity to improve their payouts may also be attractive. The top five Russell 2000 members that have increased payouts over the past five years are Albany International Group (NYSE), which makes fabrics used with paper-manufacturing machinery, with a jump to 22 cents from five cents a share; Citizens First Bancorp, up to 32 cents from eight cents; life-insurance provider Financial Industries, rising to 92 cents from 25 cents; chicken and pork distributor Seaboard (NYSE), up to $3 from $1; and banking company Port Financial, rising to 72 cents from 28 cents.
Small-cap money managers are mixed about the president's proposal, saying it may benefit big caps more than their group, but they generally aren't planning to overhaul their strategies. The portfolio managers say if a company is a good one it will rise in price whether it is big or small, pays dividends or not.
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Friday's Market Activity
Small stocks joined their larger counterparts in posting a rise for their first full week of trading in 2003, but those hoping for the "January effect" to kick in -- where small caps lead the market -- were disappointed. Still, everyone did display strength, even on Friday, as stocks ended with gains after an initial selloff. The recovery helped small stocks mark their second consecutive weekly rise.
The Russell 2000 added 0.50 points, or 0.13%, Friday, closing at 396.44, with a gain of 1.57%, for the week. The S&P SmallCap 600 rose 0.35, or 0.17%, to 201.32, part of a gain of 0.60% for the week.
Steel and other materials stocks were among the session's best performers. U.S. Steel (NYSE) began the session as a small-cap stock with a market capitalization of less than $1.5 billion, but closed as a large-cap by passing that threshold with a gain of 7.3%, or $1, to $14.70. Several analysts Friday made positive comments about the company's plans to buy nearly all the assets of National Steel, continuing the industry's consolidation. Among other steel producers, Allegheny Technologies rose 2.4%, or 14 cents, to 6.05, and Worthington Industries rose 1%, or 15 cents, to 15.97, both on the NYSE.
Restaurant stocks, which have struggled lately, reversed course, aided by Ruby Tuesday (NYSE), which rose 6.4%, or 1.22, to 20.27 after saying in a conference call that sales momentum is building and the company will invest marketing dollars to drive same-store sales. Lone-Star Steakhouse rose 1.8%, or 44 cents, to 25.48, and Jack in the Box (NYSE) rose 1.4%, or 24 cents, to 17.45.
But health-care providers struggled after UBS Warburg and Lehman Brothers downgraded LifePoint Hospitals, which lost 9.4%, or 2.48, to 24.02, with UBS saying it sees a more "uncertain" environment for the industry. Province Healthcare fell 6.9%, or 65 cents, to 8.80 and Pediatrix Medical Group declined 1.5%, or 61 cents, to 39.94, both on the NYSE.
DeCode Genetics was one of the session's best gainers, rising 41%, or 87 cents, to 2.97 after the Reykjavik, Iceland, genetic-information provider was upgraded to overweight from neutral by J.P. Morgan, which said little value is being given the company's product pipeline which includes genetic identifiers for heart ailments.
OM Group (NYSE) rose 28%, or 1.79, to 8.14 on reports that cobalt prices are rising, which could boost profits of the specialty-chemical maker, which uses cobalt as a raw material and also refines it.
Kana Software gained 30%, or 90 cents, to 3.88 after the Palo Alto, Calif., online communications-systems provider was upgraded to buy from hold by W.R. Hambrecht.
(END) Dow Jones Newswires
01-12-03 1935ET
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