A Battle Between Dividends and the PE Ratio - Deluxe Corporation (DLX)

Small businesses are going to power the economy to recovery eventually. Consider Deluxe Corporation (DLX) as a play on this theme, with it's handy 5.7% dividend yield.

It is not often that your dividend yield is level-pegging with your price to earnings (PE) multiple, but that is what is on offer if you are considering an investment in the Deluxe Corporation (DLX), a market leader in the small business financing and support sector.
 
Founded in 1915 the company has evolved from being a check printing business to providing support to in excess of 4 million small businesses around the US. These services include logo design, web services and search engine marketing, and personalized check printing to help small businesses and their financiers work closer together.
 
The company trades on a price to earnings multiple of 7.18 times historical earnings and investors enjoy a dividend yield of 5.7%.
 
Reporting second quarter earnings in July, the company showed that earnings per share were up 19% year on year, delivering $0.68 for the quarter with net income of $33.6m. Revenue was $348m compared to $332.1m previously and importantly gross margin grew to 65% from 61.8% in the previous quarter.
 
Cash from operations the first half of 2010 was down by $15.2m to $70.6m which the company attributed to "performance-based compensation payments" and a higher tax bill.
 
Despite producing lower cash from operations, the company maintained strong operating margins while making a number of strategic advances during the quarter including growing business services revenue in excess of 50% over second quarter 2009, introducing new brand awareness advertising and starting to realize both revenue and cost synergies from the acquisition of Custom Direct. The acquisition of Custom Direct added $16.9m to the revenue line.
 
The company is also set to receive a large payout of $24m in termination fees on a big contract the group had held. Of course the termination of the contract in question brings gives rise to concerns over lost revenue.
 
Full year revenue is expected to be between $1.390bn and $1.415bn with operating cash flow between $220m and $230m in 2010.
 
With the future of the US economic recovery being closely tied to the fortunes of the small business sector, investors who believe the economic recovery is going to be spearheaded by small businesses may want to consider an investment in Deluxe Corporation (DLX) as a play on this theme.

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