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Comtech Puts Its Cash to Work—For You

Initiating a dividend remains one of the most bullish signs of a company’s future. After all, businesses aren’t going to kick back cash to shareholders if they need that money to keep the doors open.

This basic premise is the whole reason Cramer likes Comtech Telecommunications , a maker of high-tech communications and services that does a lot of business with the government. Despite a tough summer for both the company and the share price, the fact that Comtech announced a dividend on Sept. 23 makes the stock buyable—just not yet. But more on that later.

Just as important as the dividend, Cramer on Wednesday was trying to teach viewers about how companies use their cash on hand. And Comtech, with $408 million in net cash on its balance sheet, is sitting on a ton.

Typically, companies put that money to work in one of three ways: an acquisition, a stock buyback or a dividend. Comtech tried the first to its share price’s detriment, announcing in May it would pick up radio-frequency amplification play CPI International for $472 million. Too bad the market hated the idea and took the stock down. (A lost government contract in July hurt CMLT, too.) It wasn’t until Comtech killed the deal in early September, in response to government scrutiny and that battered share price, that the stock started to recover.

Then last week came the dividend announcement of $1 a share, in addition to a $100 million buyback program worth 13% of Comtech’s current market capitalization. Now the buyback’s great and all, but it doesn’t speak as loudly about the strength of Comtech’s business as the dividend. Why? Because buybacks can serve as mere lip service to the smart use of cash. Companies buy a token amount of shares on the open market, or none at all, and then sit on that money.

But no company—save Eastman Kodak and Wells Fargo , as far as Cramer remembers—initiates and then cancels its dividend. Rather it’s most often a sure sign that business is strong and should continue to be. Admittedly, after reporting a better-than-expected quarter, Comtech offered inline earnings guidance on “light” revenue projections, Cramer said, but “that’s fine—people were expecting very bad news from this company, and they didn't get it.”

If that’s the case, then why wait to buy CMLT? Because investor worries over the potential loss of more contracts could take this stock, presently yielding 3.7%, down to a level where it yields 4%. Cramer recommended waiting until it gets there, at $25 a share.

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