It’s time to do some more digging in the Basic Materials sector this week as it’s my lowest weighted sector again. The last time I added to this sector was back in June when I added to my APD position.
Basic Materials sector
The Basic Materials sector consists of companies involved in the production of raw materials, so it tends to be affected by economic growth. When companies aren’t manufacturing many products, they’re also not buying many raw materials. Within the sector there are several different sub-industries such as chemicals, mining, packaging, paints, building materials and agriculture.
The stock sector as a whole is up 7.73% this year to date which is squarely in the middle of the 10 sectors that I follow (excluding Real Estate). You can find the list and stats over at Morningstar.
Here’s my portfolio as of 21-September grouped by market sector. Basic Materials is my lowest valued sector and it’s outside my +/- 10% weighting rule. This is followed by the Communications and Consumer Defensive sectors respectively.
I currently have positions in DOW, APD and ROC in the Basic Materials sector.
My Basic Materials sector dividend stocks
Dow Chemicals (DOW) is the largest chemical company in the US with a market capitalization of $63B. It has a wide range of business divisions, including Electronic (including materials for LED displays and semiconductors) , Coatings (adhesives, sealants), Performance Materials (de-icing products, carpeting, personal care), Performance Plastics (adhesives, bottles and other plastic products), Agricultural Sciences (pest management and plant biotechnology products) and Feedstocks / Energy (including the production of chlorine for a variety of downstream products).
DOW isn’t even on the Dividend Champion list as it cut its dividend in 2009 from $.45 per share to $0.15. Since then however it has increased its overall dividend every year, although somewhat inconsistently and it used the increase-every-other-year technique in 2013. It’s likely to be back on the list as a 5 year challenger next year. Its payout ratio is 48% with a current dividend yield of 2.8% or $0.37 per share. The payout ratio is good although it reached 169% in 2012 and over 270% in 2008 and 2009 due to low income. The last 5 years’ annualized dividend growth is 19.8% but to put the extent of 2009’s cut into perspective, the dividend payment in 2013 of $1.28 is still lower than the dividend paid out back in 2004 ($1.34).
Its P/E of 19.4 is higher than the industry average of 18.6 and the S&P 500 average of 18.7. Typically the P/E value is quite a bit under the S&P average with the exceptions of the low income years (2008, 2009 & 2012) so this year’s current value is looking more expensive than normal. The 5 year estimated EPS growth is 10%.
Air Products & Chemicals
Air Products & Chemicals (APD) is one of the world’s largest industrial gases companies. It’s a $28B company and operates in four main segments – Merchant Gases (oxygen, nitrogen and argon), Tonnage Gases (gases supplied to energy production and refining industry), Electronics and Performance Materials (chemicals for production of silicon and semiconductors) and Equipment & Energy (equipment for processing and refining gases).
APD is a Dividend Champion, having increased its dividends for the last 31 years in a row. It currently pays $0.77 a share for a yield of 2.3%. It is backed by a payout ratio of 61% which is the highest it’s been in the last 14 years although 2009’s value of 59.7% is pretty close. Over the previous 5 years the dividend growth was about 11%.
APD has a high valuation at present with a P/E of 27.9 vs. the industry average of 18.6 and the S&P of 18.7. Looking at the valuation history on Morningstar, the stock has had a higher P/E valuation than the S&P every year since 2004, although the gap has been increasing for the last 3 years suggesting that it’s getting more expensive. Projected 5 year EPS growth is 9.8%.
Rockwood Holdings (ROC) is the world’s leading producer of lithium products and the second largest supplier of service treatment chemicals with a market cap of $5.5B. It has two main segments, Lithium (producing lithium products for a variety of industries including lithium batteries) and Surface Treatments (metal treatment products for the automotive, aerospace and general industry). It’s also in the process of being bought by Albemarle (ALB) for $50.65 per share plus 0.4803 of an ALB share which adds up to $81 per share at current prices.
ROC is also not on the Dividend Champion list – I bought it before I knew about the list. It has a short dividend increase history with only a 1 year increase since 2013. The dividend is currently $0.45 giving a yield of 2.2%. Its TTM Payout Ratio is currently 180%. The dividend growth over the last 5 years is 0% because its history isn’t long enough.
ROC has a high P/E of 81 compared to the industry average of 18.1 and the S&P’s 18.7 although its real value now is determined by its sale price.
I bought ROC at a price of $60.10 in April 2013, so the current price represents a capital gain of about 32% or $135.
Choosing new stocks to consider
I’ve also picked some other stocks from the Dividends Champion List that caught my eye to see how they compare and if it’s worthwhile to start a new position to diversify into another segment. I have a loose target of around 4-5 stocks in a given sector so there’s room in my portfolio for another couple of Basic Material companies if one stands out.
My initial screening of the Dividends Champion List is as follows:
- Include only stocks from Champions, Challengers and Contenders filtered by the sector I’m interested in
- Exclude any stock which is projected to have negative growth in the next 5 years
- Include only stocks with a dividend yield above 2%
- Exclude ADRs and non-US companies
- Exclude the Chemicals industry as I want to diversify within the sector
There were 5 companies meeting the above criteria, all of them having had paid dividends for 5 years or more. I’ve chosen four of them below, each from a different segment.
Other Basic Materials stocks
Compass Minerals International
Compass Minerals International (CMP) mines and produces salt in the US and the UK with a $3B market cap. The company in particular provides salt for de-icing roads.
CMP is a Dividend Contender with a 10 year dividend growth history. It pays a 2.7% yield at a quarterly dividend per share of $0.60. It has been consistent in dividend increases; increasing them in February each year since 2005. Its TTM payout ratio of 62% is a slight increase over last year but better than 2012’s 73%. The P/O ratio is fairly volatile ranging from 130% in 2005 to 28% in 2008 & 2009. The last 5 years’ annualized dividend growth from 2009 to 2014 is about 11%.
Its P/E of 23.5 is below the industry average of 128.2 but above the S&P 500 average of 18.7. Over the last ten years, the P/E value has typically been higher than the S&P average. This year is no exception and the gap is increasing over last year’s difference of 2 points. CMP has an estimated 5 year EPS growth of 7.5%.
Sonoco Products (SON) is a $4.5B company producing both consumer and industrial packaging. It has been in business for over 100 years and paid consecutive dividends since 1925. It’s also a dividend champion, having increased dividends for each of the last 33 years.
The current dividend yield is 3.2% with a reasonable 56% payout ratio at $0.32 per share. The payout ratio is fairly stable which is always a good sign, ranging between 50 and 70% on average and being at the low end of that range currently. The dividend growth over the last 5 years has been about 3.3% so fairly conservative growth which may help to explain the stable P/O ratio.
The company has a P/E of 17.7, lower than both the industry average of 18.8 and the S&P’s 18.7. Historically, its P/E has been higher than the S&P’s value every year since 2004 except for 2007, so it’s looking cheaper than it’s been for a while. Its estimated 5 year EPS growth is 5.5%.
Bemis Co Inc (BMS)
Bemis Co Inc (BMS) is a $4B packaging company established in 1858 in St. Louis, growing from producing machine-sewn cotton bags to being a global supplier of flexible packaging that can be found in virtually every aisle of a grocery store. It operates 67 facilities in 11 countries and is organized into 3 segments; US Packaging, Global Packaging and Pressure Sensitive Materials. They’ve recently announced the sale of their Pressure Sensitive Materials company (MACtac) to fund growth in their core packaging business.
BMS has increased its dividend for 30 years. The current dividend of $0.27 gives a yield of 2.8%. The Payout Ratio is stable and is currently at 48%, the lower end of its range over the last 10 years. It has an extremely consistent pattern of dividend increases, increasing dividends each February since 1985. Dividend growth has been 3.7% over the last 5 years so this is more of a tortoise than a hare.
The P/E is 17.7, lower than both the industry average of 18.8 and the S&P average of 18.7. Historically the P/E has nearly always been higher than the S&P average with the exception of 2004 and 2007 so it’s looking cheaper this year. Projected EPS growth for the next 5 years is 6.5%.
Fastenal Co (FAST)
Fastenal Company (FAST) is a $13.7B company which sells industrial and construction supplies. It supplies a wide variety of products ranging from threaded fasteners, cutting tools, electrical supplies through to packaging materials and chemicals. Most products sold are made by other companies, although it is diversified and not reliant on any one supplier.
It’s a Dividend Contender with a 14 year dividend growth history. Its dividend yield is 2.2% ($0.25 per share) with a payout ratio of 64%. The P/O ratio is on the high side of its historical range; it changed from an average 30% P/O in 2004-2008 to an average 50-60% since then. FAST’s dividend growth over the last 5 years has been about 22%, although the dividend increases are somewhat random in nature with no obvious methodology that I can see.
Its P/E of 29.3 exceeds the industry average of 28.8 as well as the S&P average of 18.7. Historically FAST’s P/E has been significantly higher than the S&P’s P/E every year since 2004 although the gap has been narrowing for the last 3 years. Estimated 5 year EPS growth is 16.9%.
And last but not least, Nucor Corp (NUE) is North America’s most diverse steelmaker with an $18B market cap. It’s another long term dividend champion having increased its dividend each year for the last 40 years. Note: According to Yahoo’s historical dividend data, NUE cut its dividend in 2009 so perhaps there is a missing stock split or something – I’m using the metric from the Dividend Champion list above.
Its dividend yield is 2.6% with a payout ratio of 82%. The P/O range is all over the map, starting out at 6% in 2004, non-existent in 2009 then reaching 340% in 2010 before trending in the 80-90% range from 2011 onwards. Despite the high P/O ratio of late, NUE’s dividend growth over the last 5 years has only been about 1.0%.
The P/E ratio of 31.6 is above the S&P’s average of 18.3 but below the industry average of 65.8. Historically NUE’s P/E has always been higher than the S&P’s since 2010 when it spiked to more than 100; before that its P/E was less than the S&P’s. Estimated 5 year EPS growth is 22%, the highest in this roundup.
I did not include Praxair (PX) in this roundup since I already have enough companies in the chemicals segment. Based on my research they are a suitable equivalent to APD and perhaps even higher quality, but their divided is below 2% so I’m not considering them.
Scotts Miracle Gro (SMG)
Scotts Miracle Gro (SMG) is another company that looks interesting; it has a good yield at 3.2% and a high historical 5 year growth rate of 29% with reasonably projected EPS growth of 11% over the next 5 years. If I didn’t have both DOW and ROC in this sector, I’d be taking a closer look.
What to buy?
Looking at all 8 choices, my criteria of requiring a 5 year dividend growth history eliminates my current holdings in ROC and DOW from the start. ROC did not pay dividends prior to 2012 and DOW lowered dividends in March 2009 although it has been increasing them ever since.
The remaining 6 companies have suitable dividend yield, however my criteria requiring a 3% dividend growth rate eliminates NUE (and very nearly SON), leaving APD, SON, BMS, CMP and FAST.
The dividend yield from the 5 remaining stocks ranges from 2 to 3% and for these 5, the higher the yield, the lower the dividend growth. In estimating their future dividend payment, I grow the current yield at a rate equal to the estimated EPS growth and estimate the return over a 5 year period. This method ranked SON as highest followed by BMS & CMP in joint second. FAST and finally APD.
CMP lost points in my evaluation because of its shorter dividend history; the remaining 4 are all 30 year veterans.
BMS, ADP and CMP gain extra credit for consistently increasing their dividends over the last 5 years (ADP every December, CMP every February). SON wasn’t quite as consistent missing out in May 2009) and FAST was the worst with dividend increases all over the map.
FAST ranked lowest of the five because of its shorter history, smaller size and inconsistent dividend schedule. CMP was next but lost out to ADP due to its shorter dividend history. SON’s higher yield put it ahead of ADP despite its lower growth. And finally, while SON had ranked highest in projected return, it lost out to BMS by a combination of P/O ratio and stable increases.
Putting it all together, I’ve decided to start a small position in BMS this week. ADP’s yield has dropped due to higher prices than last time so it’s less attractive (and more expensive) and I’d like to diversify in this sector some more.
Here’s the outcome visually.
My purchases this week
So total purchases (including my ongoing fund investing) this week will be:
- $330 Individual Stocks (BMS)
This purchase should increase my yearly dividend income by about $10.
Full disclosure: I am long ROC, ADP & DOW.
Quote of the day
I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.