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Under the Radar: Cheap stock could pay big

As 2010 approaches, investors are migrating toward cheap, dividend-paying stocks for safety. While investors are favoring Dow Jones Industrial Average components like Microsoft and McDonald's, many small-caps offer value and dividends, along with strong growth potential.

Cleco Corp.sells electricity in Louisiana. Its third-quarter net income surged 61 per cent to $60-million, or 99 cents a share, but revenue decreased 30 per cent to $242-million. Profit spreads improved dramatically, helped by a decrease in power purchased for utility customers. Cleco's gross margin rose from 16 per cent to 25 per cent, and its operating margin climbed from 10 per cent to 16 per cent.

Cleco's balance sheet has obvious weaknesses. Just $74-million of cash and a quick ratio of 0.6 demonstrate weak liquidity. While utilities often rely on debt financing, the $1.2-billion it owes translates to a debt-to-equity ratio of 1.1, which is higher than ideal. We give Cleco a financial strength score of 6.7 out of 10, less than the "buy"-list average of 7.1.

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The utility's shares trade at a discount to peers based on trailing earnings, projected profit and book value. On the other hand, Cleco is an expensive investment when you consider its sales and cash flow per share.

Still, its 3.6 per cent dividend yield is higher than the S&P 500 Index average of 2.8 per cent. And a payout ratio of 52 per cent suggests there's room to grow.

Cleco shares have risen 17 per cent this year, outperforming the 14 per cent advance of the S&P 400 Utilities Index. The stock has climbed 10 per cent annually, on average, during the past five years, compared with a 6.1 per cent gain for the benchmark.

Over the past three years, Cleco's revenue has decreased 5 per cent annually, on average, but its profit has risen 18 per cent, more than those of brand-name utilities such as Consolidated Edison and FPL Group.

We rate Cleco "buy."

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