Saturday, March 3, 2012

Focus on Basic Materials

This week I will be taking a look at dividend growth stocks in the basic materials sector.  This sector describes companies involved with the discovery, development, and processing of raw materials such as metals, chemicals, and forestry products.  I currently do not have any stocks from this sector in my portfolio, I thought it would be worthwhile to do some research.

I used a stock screener to get started.  I screened for P/E less than 20, Est. long term growth greater than 5%, yield greater than 2.5%, dividend growth greater than 5%, payout ratio less than 60%.  I then checked the results to get rid of any companies who cut or froze their dividend in the past 5 years.  Here are the remaining stocks:

Air Products and Chemicals (APD)
Dividend Increases: 29 years (champion)
Mkt Cap: 19.35B Large Cap
Beta: 1.29

Air Products and Chemicals produces gases, chemicals, and equipment for sale worldwide.  APD operates in 4 segments: Merchant Gases (40%); Tonnage Gases (33%); Electronics and Performance Materials (23%); and Equipment and Energy (4%).  It has a diverse catalog of products such as oxygen, helium, argon, carbon dioxide, specialty gases, equipment for natural gas liquefaction, equipment for air separation, and materials to manufacture LCD screens.  It serves a variety of industries such as medical, glass making, pulp and paper, metal manufacturing, industrial cleaning, petrochemical, and electronics.  This company is diversified.  Sales by region: U.S. 38%, Europe 31%, Asia 24%, Canada/Latin America 7%.

I expect APD to grow in the low double digits or high single digits.  Frankly this company isn't sexy, but sells products needed in a wide variety of industries and is shareholder friendly.  To fuel growth, APD is targeting emerging markets in Asia and Russia.  Air Products is seeing increasing margins and profits; its future looks bright.  I would like to be an investor in APD, the only thing holding me back is the share price.  I've come close to buying APD in the past, but at this point in time I'm waiting for a pullback.  It has a high beta which could be an advantage in a declining market for investors looking to add shares at better valuations. 

Compass Minerals Intl. (CMP)
Dividend Increases: 9 years (challenger)
Mkt Cap: 2.36B Mid Cap
Beta: .7

Compass Minerals produces salt and specialty fertilizers for U.S., U.K., and Canadian markets.  About 48% of sales come from highway deicing compounds, 33% consumer and industrial salts, and 18% specialty fertilizers.  U.S. demand for highway salts typically increases 1-2% per year with prices increasing 3-4% to boot.  CMP expands existing mines and also uses an acquisition strategy to meet demand.  Compass recently announced it has purchased rights to expand a salt mine in Ontario.  In addition to salt mines, Compass uses solar and mechanical technology to extract minerals.  CMP has a records management business in the U.K. making use of an old salt mine 500 ft underground to store documents for other businesses.  It contributes 1% of sales.

This is a boring but necessary business.  Having lived in snowy parts of the country, I recognize clear roads are essential to our way of life.  In my opinion CMP is attractively priced right now, a rarity in this market.  We've had a mild winter this year, which could explain why this particular stock is still attractive.  I like the growth and dividend growth potential of this company coupled with its yield and low payout ratio.  I'm definitely adding CMP to my watch list.

Only two companies made my list today.  I am aware of other dividend champions in the materials sector such as RPM, NUE, and BMS.  These are fairly popular among dividend growth investors, but did not pass my screens for one reason or another.  Added CMP to my Watch List page.


  1. APD has been on my watch list recently, but like you I desire a more attractive valuation. Last fall the price dropped into the high 70s, where the yield would be 3%. If it were to go back down into the low-mid 80s, which would be about a 10% drop, then I would consider starting a position.

    I am not familiar with CMP, but thanks for drawing my attention to it.

  2. I think CMP is interesting. Half the business is road deicing, which is weather dependent. I own a couple natural gas MLPs which also seem to be affected by weather. Warm winters already negatively impacts my MLPs, I'm not sure I want to rely on winter weather even more with Compass. I would consider CMP at a lower price to have a better margin of safety and yield.

    APD suits my portfolio better. I'd like to be a stock owner eventually.