Up to date on September twenty ninth, 2021 by Bob Ciura
Stepan Co. (SCL) has a dividend observe document that few corporations can rival. The corporate presently sports activities a streak of 53 consecutive years of accelerating dividends, making it certainly one of simply 32 shares in your complete inventory market with a dividend improve streak above 50 years.
That places the corporate among the many elite Dividend Kings, a small group of shares which have elevated their payouts for no less than 50 consecutive years. You possibly can see the total listing of all 32 Dividend Kings right here.
We’ve got created a full listing of all 32 Dividend Kings, together with essential monetary metrics comparable to price-to-earnings ratios and dividend yields. You possibly can entry the spreadsheet by clicking on the hyperlink beneath:
Dividend Kings are the “better of one of the best” relating to rewarding shareholders with money returns, and elevating their dividend payouts yearly. This text will talk about Stepan’s dividend and valuation outlook.
Stepan traces its origins again to 1932 when it was based by 23-year previous Alfred C. Stepan Jr, and was recognized on the time as Chemical Distributors. The fledgling enterprise’s first product was a chemical that managed highway mud on Illinois’ nation thoroughfares, offered from a rented desk at Chicago’s North Pier Terminal. These humble beginnings had been the beginning of what has turn out to be a multi-billion chemical powerhouse.
The corporate remains to be headquartered in Illinois and manufactures primary and intermediate chemical compounds, together with surfactants, specialty merchandise, germicidal and material softening quaternaries, phthalic anhydride, polyurethane polyols and particular elements for the meals, complement and pharmaceutical markets.
It has expanded from that desk on the North Pier Terminal to a very world attain with its 21 manufacturing websites in 11 nations all through North and South America, Asia and Europe. Stepan additionally boasts world R&D facilities, a worldwide distribution community and a broad portfolio of merchandise to satisfy a various group of buyer wants.
Stepan is organized into three distinct enterprise traces: surfactants, polymers and specialty merchandise. These companies serve all kinds of finish markets, which means that Stepan isn’t beholden to a handful of industries; an essential trait throughout an financial downturn.
Supply: Investor presentation
The surfactants enterprise is Stepan’s largest by income, accounting for over 70% of complete gross sales. A surfactant is an natural compound that accommodates each water-soluble and water-insoluble parts. Surfactants are key elements in client and industrial cleansing compounds comparable to detergents, cleaning brokers, emulsifiers, foaming or defoaming brokers, viscosity builders, degreasers and others.
Stepan provides a broad vary of surfactant chemical compounds and creates customized surfactants and formulated blends to satisfy distinctive buyer calls for. These surfactants are utilized in all kinds of purposes comparable to a foaming agent for shampoo, brokers utilized in oil restoration and emulsifiers for agricultural pesticides.
The polymers enterprise is Stepan’s second-largest by income, producing about 24% of the corporate’s complete. The polymers division is additional damaged down into three segments: polyester polyols, powder coating resins, and phthalic anhydride. Polyester polyols are utilized in all kinds of each polyurethane and polyisocyanurate purposes. Stepan produces a full vary of fragrant and aliphatic polyester polyols to be used in inflexible foams, in addition to many coatings, adhesives, sealants and elastomers purposes.
Polyester resins are designed with both hydroxyl or carboxyl performance and mix with numerous curatives to kind sturdy, engaging, environmentally pleasant powder coatings. The corporate’s RUCOTE resins can improve the standard, efficiency, and visible enchantment of finishes on all kinds of merchandise.
Phthalic anhydride is a vital a part of Stepan’s Polymers division. Along with being utilized in a lot of its polyester polyol chemistry, phthalic anhydride is a key uncooked materials for plasticizers and unsaturated polyester resins.
The third division, specialty chemical compounds, is Stepan’s smallest by income, producing solely about 4% of the corporate’s complete. The phase produces science-based dietary oils used within the meals, vitamin and pharmaceutical industries. Its merchandise are naturally derived elements that present particular dietary advantages in finish markets like dietary dietary supplements, drinks, dietary powders, toddler vitamin and weight administration.
Stepan reported second quarter earnings on July 28th, 2021, with outcomes coming in higher than anticipated on each the highest and backside traces. Web revenue got here to $43.3 million, or $1.85 per share, that are each information. Each are up from $35.7 million and $1.54 per share, respectively, within the 12 months–in the past interval. On an adjusted foundation, internet revenue was $42.2 million, or $1.81 per share.
Complete volumes had been up 5% 12 months–over–12 months. Surfactant working revenue was $45.9 million, down from $48.5 million within the 12 months–in the past interval. The decline was due to greater provide chain prices on account of inflationary pressures and better deliberate upkeep prices.
Surfactant gross sales quantity was down –6% however that was greater than offset by improved margins, in addition to combine. Polymer working revenue was $23 million, up from $15.5 million in the identical interval final 12 months. The achieve was on account of a 44% improve in volumes. International inflexible polyol quantity was 41% greater 12 months–over–12 months, largely on account of an acquisition. Natural progress was nonetheless sturdy at 7%.
The corporate’s acknowledged progress technique consists of R&D that develops a steady stream of value-added purposes, creating new processes for present merchandise in addition to refining present processes. It additionally makes focused acquisitions once in a while when acceptable, selecting up manufacturing capability or another strategic benefit from its acquisitions.
It grows additional by establishing manufacturing areas and gross sales workplaces the place its prospects are on this planet, which means it will possibly extra effectively and successfully serve these different prospects.
Lastly, it seeks to develop by strategic alliances by way of joint ventures the place Stepan acts as a technical skilled to enhance the sources of a neighborhood accomplice with sources within the space. This complete progress technique has labored for Stepan previously and whereas it’s not a real progress inventory, over time it has produced significant income enlargement utilizing these methods.
We anticipate 5% annual earnings-per-share progress by 2026. We additionally word that COVID-19 has launched extra volatility within the firm’s outlook than beforehand existed.
Stepan’s progress has been considerably lumpy previously, however on the entire, the corporate produces respectable progress over the long run. Decrease demand within the polymers enterprise may be very clearly Stepan’s principal earnings danger proper now.
Aggressive Benefits & Recession Efficiency
Stepan’s aggressive benefits embrace its buyer base and finish market range, its world provide chain and distribution community, in addition to its technical experience. Stepan is a real market chief in its area of interest and this has fueled its progress previously 80+ years.
Stepan’s prospects are extraordinarily numerous, together with finish markets like agricultural merchandise, building, dietary dietary supplements, cleansing merchandise, private care, laundry, oilfield providers, prescription drugs and plenty of extra. There aren’t many companies on this planet that serve such numerous finish markets, and that gives Stepan publicity to numerous totally different industries. This creates numerous alternatives for progress in addition to recession resistance.
Nonetheless, we word that the present recession is in contrast to any prior recession, given it’s focused to sure sectors of the financial system. That is hurting the polymer enterprise for Stepan, however producing greater demand for sure surfactants.
As well as, the corporate operates world wide. This enables it to have technical consultants and gross sales professionals on the bottom close to its prospects, creating merchandise and fixing issues extra shortly and effectively than if it had been centralized right here within the US. Including in its vertical provide chain – which improves margins and reduces provider danger – Stepan’s world footprint is a large asset.
Stepan’s merchandise are additionally wants and never desires, which means that in recessions, the corporate fares very effectively. Certainly, in the course of the Nice Recession, it carried out tremendously effectively; Stepan’s earnings-per-share throughout and after the Nice Recession are beneath:
- 2007 earnings-per-share of $0.75
- 2008 earnings-per-share of $1.20 (improve of 60%)
- 2009 earnings-per-share of $2.92 (improve of 143%)
- 2010 earnings-per-share of $2.95 (improve of 1.0%)
Income moved greater annually throughout this era apart from 2009, however an incredible quantity of margin enchancment throughout this era noticed Stepan drastically improve its earnings regardless of the financial malaise that had the world in its grips. Working margins had been simply 1.4% in 2006 however peaked at 8.2% in 2009, driving the earnings progress Stepan loved throughout this era.
Stepan is a really recession-resistant enterprise and that’s one benefit it supplies to shareholders. The corporate once more proved its resilience in 2020, because it continued to boost its dividend even within the difficult financial circumstances attributable to the pandemic.
Valuation & Anticipated Returns
We presently anticipate $6.85 in earnings-per-share for this 12 months, which might symbolize a big improve from final 12 months’s earnings. With the present share value at ~$113, Stepan trades at a price-to-earnings ratio of 16.5, which is beneath our estimate of honest worth, at 18 occasions earnings.
Stepan inventory seems to be barely undervalued proper now, in our view. If the P/E a number of expands from 16.5 to 18 within the subsequent 5 years, the rising P/E a number of would increase annual returns by 1.8% per 12 months.
Stepan, as a Dividend King, has been returning to money to shareholders for greater than a half-century, and its latest progress charges in capital returns have been spectacular.
Supply: Investor Presentation
Up to now decade, Stepan has managed to spice up its complete annual capital returns – buybacks and dividends – by 13%. That’s very spectacular and whereas we don’t suppose that kind of progress fee may be sustained for the long-term, the dividend may be very protected with a payout ratio of round 20%.
Whereas the yield isn’t spectacular at simply 1.1%, traders can sleep effectively at night time understanding their payout is protected, and can nearly definitely proceed to be raised for many years to come back.
The 1.1% yield, mixed with 5% projected annual EPS progress and a 1.8% annual increase from an increasing valuation a number of, we undertaking 7.9% complete annual returns for Stepan within the subsequent 5 years.
Resulting from its low dividend yield, Stepan doesn’t qualify as a high-income inventory regardless of its Dividend King standing. Nonetheless, the corporate raises its dividend each 12 months. The inventory additionally seems to be undervalued right here together with our future expectations of earnings progress.
Based mostly upon that, shareholders can anticipate stable complete returns from right here, though not sufficient to warrant a purchase advice. Stepan is a frontrunner in its area of interest and it’s a sturdy enterprise with a rising dividend, making it a robust maintain for dividend progress traders.
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