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Dividend-paying small-cap has more growth ahead

Investors in Com Dev International Ltd. are betting the company's first-ever dividend signals a new era of growth for the space hardware maker after years of volatility.

Shares in the small-cap company, which makes satellite equipment for governments and corporations such as Boeing Co. and Lockheed Martin Corp., are up about 10 per cent since it said two weeks ago that it would initiate a quarterly dividend later this month.

Cambridge, Ont.-based Com Dev says growth in its equipment business, combined with its expanding exactEarth ship-tracking technology, are sustainable enough to offer a payout to shareholders for the first time in its 20-year history. That's despite cuts to a number of government programs, which have negatively affected revenues.

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Analysts are also supportive of Com Dev. Five out of six that cover the company have a "buy" or equivalent rating on the stock, and at least two recently increased their price targets.

"I think it's an interesting name right now," said CIBC World Markets analyst Stephanie Price, who has a "sector outperformer" rating on Com Dev and increased her target last week to $5.50 from $5.

Ms. Price is especially bullish about its high-margin exactEarth business, which helps governments and companies locate their ships. Com Dev is a leader in this technology, and its revenues continue to grow as more companies seek the technology for security and search-and-rescue operations.

The company is also seeing more business from its commercial clients, which include broadcasting and telecom companies, while its government and military revenues have decreased due to ongoing budget cutbacks. About 63 per cent of its revenues came from the commercial division in the second quarter ended April 30, compared with 47 per cent for the same period last year.

"Com Dev is successfully transitioning into a high-growth, catalyst-driven company that is appealing to a significantly wider audience of investors," Paradigm Capital analyst Daniel Kim said in a recent note, while increasing his target to $6.75 from $6.

He said the shares have lagged in the recent rally of tech stocks, and that its growth "supports a meaningfully higher share price."

Com Dev's thinly traded stock is currently around $4.20, which is just shy of its seven-year high of $4.40 reached in October, when Com Dev announced its largest-ever commercial award – a $65-million contract to deliver components for multiple satellites.

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The stock has bounced around since then, including hitting a 52-week low in January of $3.42. The shares started to pick up days later, after the company announced year-end results showing its highest backlog in five years and its intention to pay a dividend in the coming months.

Com Dev is one of the largest positions now held by Lester Asset Management, according to its chief investment officer and portfolio manager Stephen Takacsy.

"It's one of the few names we've added this year," said Mr. Takacsy. "We are desperately searching for value in this market and it's getting increasingly hard."

He likes the dividend, yielding about 3 per cent, and the company's steady backlog.

"It fits all the boxes we like to tick when we make a new investment," he said. "I think it has some really good upside from here."

Not everyone is as optimistic about where Com Dev's stock is heading.

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Salman Partners analyst Naser Iqbal has a "hold" on Com Dev and a $4 price target.

"I think the stock price is fully valued. It reflects the recovery in earnings and the value of exactEarth," Mr. Iqbal said.

When it comes to space stocks, he prefers MacDonald Dettwiler and Associates Ltd., which he sees as more predictable for investors.

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