Renewable Dividends: Technology

The last two posts, “Renewable Dividends:  Utilities” on January 8^th and “Renewable Dividends:  Infrastructure” on January 12^th feature energy companies with enviable dividend payouts.  Renewable utilities are not the only environmentally friendly companies that pay dividends.  Although typically associated with growth returns, technology companies can be surprisingly generous to shareholders.    

Based in U.S. heartland FutureFuel Corporation (FF:  NYSE) develops and produces specialty bio-chemicals and biofuel.  Over the last fifteen years FutureFuel has matured from its beginnings as a biofuel acquisition vehicle.  No doubt the company’s first acquisition has influenced the paths along which FutureFuel has traveled.  early on the company acquired the chemical division of the Eastman Kodak Company, giving FutureFuel access to a decades-long operational history and extensive experience in specialty chemical development and production.

Today about half of FutureFuel’s revenue is from the sale of biofuels made from vegetable oil, fats and grease feedstock.  The company has perfected a transesterification technology to accept a wide range of low-cost feedstocks, including poultry fat, inedible tallow, inedible corn oil, pork lard, yellow and white grease.  FutureFuel production facilities have capacity to produce up to 58 million gallons of biodiesel per year.

Custom specialty chemical manufacturing and services account for about 45% of FutureFuel’s revenue.  FutureFuel is somewhat circumspect in regard to its specialty chemicals production, in part due to confidentiality agreements with customer that contract for production.  That said, the company has stated that it’s custom manufacturing portfolio includes agrochemicals, polymer modifiers and fabric care markets.  There was a time when FutureFuel was contracted to produce a laundry detergent additive and a proprietary row crop herbicide, resulting in some dependency upon two customers.  The ‘fabric care market’ and ‘agrochemicals’ sound very much like those two products.

Sales of performance chemical tops off revenue sources.  Glycerin products, which are a byproduct of the biodiesel production, are included among performance chemicals.  FutureFuel upgrades its glycerin to an industrial grade that captures from value in the supply chain.

FutureFuel’s revenue dropped 30% in the year 2019 to $205.2 million after two strong years in 2018 and 2017.  Exemptions for small oil and gas refineries offering by the Trump Administration during the year 2019, had a negative impact on the U.S. biodiesel industry.  FutureFuel was not immune to the demand destruction.

In the first nine months of 2020, FutureFuel experienced even further slowing in sales volumes.  In the period revenue totaled $154.6 million.  Retroactive restoration of renewable fuel tax credit helped prop up profits.  Thus, FutureFuel reported $23.8 million in gross profit in the first nine months of 2020, compared to $12 million in the same period in the previous year.  The dramatic recovery in profits trickled all the way to earnings per share which are running at $0.94 per share in the nine-month period in 2020.

Dividend hunters may be better informed by scrutinizing cash flows from operations.  In the first nine months of 2020, FutureFuel coaxed out $76.6 million in cash flow from operations, representing a sales-to-cash conversion ratio of 49.5%.  Of course, this was boosted by the tax credit payment.  The cash conversion rate was 16.9% in the full year 2019.  Thus even during a period of demand destruction and unfavorable regulatory actions, FutureFuel has proven its operations are well structured to generation cash.

Of course, it is cash that is critical for a stable dividend payout policy.  FutureFuel has delivered exactly that  -  a consistent $0.24 per share over the last several years.  Only in 2016 did the company not pay that amount.  In 2016, FutureFuel paid special and regular dividends totaling $2.77 per share!

Debt burden and maintenance capital requirements can compete for cash resources.  FutureFuel maintains a debt free balance sheet.  The company is otherwise well fortified with $180.2 million in cash and $63.5 million in marketable securities on the balance sheet at the end of September 2020, the last time the company provided details on balances.  FutureFuel used $7.0 million in maintenance capital investments in 2019, and an additional $3.7 million in the first nine months of 2020.  At least at the current level of cash generation and investment, FutureFuel’s dividend appears well funded.

FutureFuel does not offer a sustainability report that have been de rigueur for shareholders clamoring for environmental responsibility.  However, investors can see that at least half of its revenue and a good share of profits originate from renewable diesel and chemicals.  Investors would certainly have ‘green dividends’ bragging rights with a stake in FutureFuel technology.

 

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.