The global chemical industry has seen a number of trends lately that are challenging the sector and driving new opportunities for both organic and inorganic growth. Among these trends, and motivating mergers and acquisitions, are emerging markets, advanced materials systems, and shale gas discoveries. The industry is facing portfolio rearrangement as many companies take steps to strengthen balance sheets, chase consolidation strategies, and create footholds in emerging markets.
Worldwide chemicals production growth in 2013 is expected at around 2-3%, despite problems led by Europe. In 2014, the US chemicals industry will be the one to watch. Additional regions enjoying a favorable outlook in this industry include the Americas and Asia. In Europe, the industry is still struggling to make growth progress in light of blows sustained in the global recession, as well as rising competitive factors.
In this article, I pick two companies operating in the chemical industry: Dow Chemicals (NYSE:DOW) and Air Products (NYSE:APD). Both offer attractive dividends with real growth potential. Additionally, it's my belief that these two players have strong business models and the ability to consistently deliver strong earnings. Both are making smart strategic moves to enhance growth and emerging market share.
How Prospects Look Bright for Dow Chemicals
In the volatile global business environment, Dow is focusing on managing every aspect of its activity through cost control measures, liberating and deploying cash to augment its capital structure and recompense shareholders. To generate earnings momentum, the company is targeting growth investments in strategic sectors such as water, agriculture, electronics and packaging, along with de-emphasizing its focus in commoditizing and non-strategic markets.
The company continues to show positive momentum with its drive to execute self-help measures in a slow-growth global marketplace, achieving strong cash flow, and with year-over-year earnings growth for the fourth successive quarter. Through its integrated value chains and the diversity of targeted end markets, Dow continues to display strong performance-chiefly in emerging geographies, and in key downstream businesses such as coatings and infrastructure, electronics, and packaging. The company continues to prioritize its resources to focus on these and other proven high-growth markets.
Over the last 12 months, the company has trimmed non-strategic businesses, including the recently announced divestiture of its polypropylene licensing and catalysts business, and pulled back on its prioritization of low-growth commoditizing businesses, including the announcements on the chlorine value chain. The company has plan in place, has identified targets and is moving forward with divestiture plans. The company will use these proceeds for future growth opportunities to generate returns to shareholders.
Dow's focus on executing self-help measures, both as tactical interventions as well as strategic moves, are working to achieve top- and bottom-line growth. At the end of the recent quarter, the company has been able to grow adjusted earnings per share by 19% year over year, representing the fourth successive quarter of EPS growth. Additionally, it has generated $1.4 billion of cash flow from operations, an increase of 27%. In TTM, it has generated an additional $3.1 billion of cash flow from operations over the past year. The strong cash flow resulting from these strategic measures is allowing the company to fund organic growth and providing additional cash for shareholders.
At the moment, the company offers a quarterly dividend of $0.32/share. Its payout ratio of 52% is also manageable. What's more, Dow's free cash flows are providing adequate cover to dividends. The company is also focusing on debt reduction. In the past quarter, it has returned $200 million of debt and, year-to-date, $2.4 billion, which drove its net debt to capital ratio down to 34.7%, well below the low end of its historical range. In addition to all of this, Dow has a number of key catalysts in place that are fueling momentum and enhancing return on capital. The company is seeking to go narrower and deeper into emerging markets and profit pools, and is deselecting portions of value chains that are no longer core to our business.
How Prospects Look Bright for Air Products
Air Products is benefiting from robust growth opportunities, thanks to its strong positions in environmental, energy and emerging markets internationally. By taking actions that encourage innovation, better integration of its businesses and disciplined, continuous improvement, Air Product is driving down costs and generating greater competitive advantage. In fiscal 2013, the company had generated approximately $10.2 billion in revenue and increased its dividend for the 31st consecutive year. Its last dividend increase was 10.90%, which took its dividends to $71 cents/share.
Air Products provides atmospheric, process and specialty gases; performance materials; equipment; and technology. The company's 20,000+ employees supply innovative solutions for the environment, energy and emerging markets in 50 countries. These include refinery hydrogen, semiconductor materials, coal gasification, advanced coatings and adhesives, and natural gas liquefaction.
In fiscal 2013, the company's overall revenue was standing at $10.2 billion, an increase of 6% over the past year, with acquisitions contributing 5% and higher energy pass-through contributing 2%. Despite a weak economy, its volume improved and its productivity initiatives more than offset inflation. The company is working on plans to build momentum and speed up earnings growth. To achieve this, it plans to remain consistent, executing against its backlog, winning lucrative new projects, implementing further productivity and cost initiatives, and loading existing assets. The investments Air Products has made over the last several years will become key drivers for its future growth. The company is looking to generate $5.70 to $5.90 per share for fiscal 2014.
Acquisitions and strategic investments will support the achievement of forecasted results in fiscal 2014. Air Products' acquisition of a 67% stake in Indura S.A, a Chilean industrial gas company, offers a substantial growth opportunity. The EPCO buyout complements the company's objective of expanding its portfolio of industrial gases offerings in the United States. Additionally, Air Products has been elected for a large off-shore LNG project in Malaysia, a major growth opportunity for its LNG equipment and technology business. The company is also making considerable progress in its hydrogen business with a plan to build a new hydrogen production plant in Canada. Combined with acquisitions and strategic investments, its cost cutting measures and work process improvement initiatives will lead Air Products to maximize returns to shareholders.
Amidst a volatile environment over the past year, the industry's total returns are standing at around 28%. Looking forward, the US chemicals industry is the one to watch. Overall, the chemical industry will grow at a moderate rate. Margins are anticipated to be fairly robust- possibly boosted by cost-cutting and continued support from low natural gas prices. Both of these companies are well set to gain momentum from recent investments, portfolio rearrangement and cost-cutting.