Published: March 4, 2010

Microcap companies often scare off a lot of investors. Companies with market capitalizations of less than $300 million are seen as volatile and risky. While that's true for many of them, every once and a while a quality microcap stands out from the crowd. In fact, this little company not only has tripled its regular distribution during the past five years, it also sports a 10.1% trailing yield (nearly matching the payouts from our "Income Security of the Month" for March 2010). This high-yield puts the stock in the top 1% to 2% of all companies listed on major U.S. exchanges.

Even better -- at least as far as shareholders and company revenues are concerned -- this Saratoga Springs, N.Y. company is in an industry that's been raging, off and on, since the dawn of human history: War. And thanks in part to the United States' current involvement in several global conflicts, the industry is not lacking for cash.

Espey Manufacturing & Electronics Corp. (AMEX: ESP) is a defense contractor that manufactures a variety of electronics for military and industrial transportation and communication systems. Founded in 1928, its products include electronic power supplies, transformers, and electronic system for use on trains, planes, ships, artillery, and communication and radar systems.

Espey pays a quarterly dividend that during the past year has amounted to $1.90, giving the company a trailing yield of about 10%. The dividend is distributed quarterly as $0.225, with a larger special dividend in December. During the past five years, the regular portion of the dividend had tripled from $0.075 per quarter in 2005 to $0.225 today. Including the special distributions, the dividend has grown by more than +500%.

The dividend is nearly covered by earnings, as Espey booked $1.84 per share during the past year. The company also has a large cash reserve of $9.5 million, or $4.10 per share, and no debt.

In the six months ended Dec. 31, 2009, revenue grew +4% over the same period in 2008. Net income, however, swelled +325% to $1.5 million during the same period. A big reason for this growth was a significant -15% decline in the cost of sales.

Espey has been a stellar performer for the past decade, including throughout the bear market. During the past ten years, its shares have returned nearly +400% since 2000, compared with -3% for the S&P 500. Last year, shares in Espey returned +13%, lagging the S&P's +26%.

However, this lag was largely due to an exceptionally strong performance in 2008, when shares returned +21%, while the S&P fell by -37%.

Despite a decade of outstanding growth, the shares are still reasonably valued. The company has a price-to-earnings ratio (P/E) of 10.4 and a price-to-book of 1.5, both of which are quite cheap compared with the S&P 500's 18.0 price to earnings and 2.2 price to book.

Espey's current strategy is to get involved in long-term, high quantity military and industrial products. As of Dec. 31, the company's backlog was $33 million, about two-thirds of which were from three large customers that it does not name.

The biggest risk to Espey is a significant decrease in American military spending. But with two active wars and a very uncertain geopolitical climate, it seems unlikely that U.S. defense spending will significantly decrease any time soon.

This $41 million company is a cheap and attractive big dividend payer.

Because of its small size it's under the radar of most everyone. In fact, no analysts follow this company. As the company's float is fairly small and illiquid (about 5,000 shares trade daily), buy strategically using limit orders and small quantities.

-- Anthony Haddad
Staff Writer
StreetAuthority

P.S. If you're looking for both high yields and capital gains, then you need to learn more about our "Income Security of the Month" for March 2010. With a strong history of increasing dividends, this small-cap oil & gas stock has returned +177% in the past 52 weeks and currently yields 10.2%. But if you want to lock in this double-digit yield you need to act quick: the closure of a $130 million acquisition announced just days ago could push shares up in a hurry. Get the full story here.