Tuesday, August 21, 2012

Dividends from Specialty Chemicals

Financial advisors are beating the drums for retirees, leading them slowly down a path to investments like dividend paying stocks and junk bonds that will provide higher income than currently offered by guaranteed certificates of deposit and money market accounts.  Asset managers do not have any trouble in getting retirees attention. Any dividends yields above 1.0% will turn heads.
It is a tougher argument for taking on the risk inherent in stocks.  The utility industry is the usual place investors look for dividend yield. Likewise telecommunications service providers and real estate investment trusts.  Besides offering above average dividends yields these sectors have low betas that mean share prices will be less volatile.  As more investors chase yields I expect prices to get bid up in these sectors.  So it makes sense to find another industry that affords good dividends with low risk.

A number of companies in one of my favorite sectors pay dividends  -   specialty chemicals  -  giving the group an above average yield of 2.0%.  Beta for the sector is 1.28, which also means it is a bit more volatile that about two-thirds of the other industry groups.  However, when it comes to valuation, the specialty chemicals group trades at an average multiple times forward earnings lower than two-thirds of the other sectors.  It is even priced at multiples lower than some of the more popular dividend-paying sectors, including telecom, water and electric utilities.

Make no mistake about it.  Investors looking for income will be putting capital at risk with positions in the specialty chemicals industry.  That caveat in mind, I found four strong specialty chemicals companies with histories of consistent dividends.  All four trade at multiples of earnings below average. 

    Dividend Yield – 2.8%
    Price/Forward Earnings Ratio – 8.0 X
    Beta – 2.03
Oil-Dri Corporation of America (ODC:  NYSE)
    Dividend Yield – 3.2%
    Price/Trailing Earnings Ratio – 18.2 X
    Beta – 0.41
Innophos Holdings, Inc. (IPHS:  Nasdaq)
    Dividend Yield – 2.2%
    Price/Forward Earnings Ratio – 11.6 X
    Beta – 1.41
    Dividend Yield – 1.1%
    Price/Forward Earnings Ratio – 11.3 X
    Beta – 1.39

One more thing these four have in common is strong free cash flow.  Each of these companies is generating plenty of cash to cover its working and investment capital requirements.  Even if none of these companies can “guarantee” their dividend, all that cash flow provides a great deal of support for a continued payout.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


1 comment:

dividends said...

Paying dividends is not an expense; rather, it is the division of an asset among shareholders.

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