I wrote an article on February 13, 2011 identifying basic materials dividend stocks that was widely read. While it has only been about 2 months since it was posted, I think it is worthwhile to review this dividend portfolio. The first critical note is that after just 2 months, not all the stocks have even paid a dividend. A couple of stocks had just paid their dividends prior to the article's publish date.
The following table shows the recent performance of these stocks relative to the SPDR S&P 500 Trust ETF (SPY):
|Company Name||Sector||Price at February 11||Price at April 21||Intermediate Dividend||Total Return|
|SPY||SPDR S&P 500 Trust||NA||133.11||133.78||0.55||0.9%|
|CLMT||Calumet Specialty Products Partners||Oil & Gas Refining & Marketing||22.70||23.09||0.00||1.7%|
|SID||Companhia Siderurgica Nacional||Steel & Iron||16.52||15.94||0.00||-3.5%|
|PVR||Penn Virginia Resource Partners||Industrial Metals & Minerals||26.82||27.91||0.00||4.1%|
|TNH||Terra Nitrogen Company, L.P.||Agricultural Chemicals||117.11||112.20||1.36||-3.0%|
|AHGP||Alliance Holdings GP LP||Nonmetallic Mineral Mining||54.21||50.60||0.00||-6.7%|
|DD||EI DuPont de Nemours & Co.||Chemicals||54.58||55.91||0.41||3.2%|
|COP||Conoco Phillips||Major Integrated Oil & Gas||71.58||80.73||0.66||13.7%|
|NUE||Nucor Corporation||Steel & Iron||47.81||46.15||0.36||-2.7%|
The first observation is that a time frame a little over two months is not really reasonable for tracking performance. While it is certainly a positive that the overall portfolio (assuming equal weights) substantially outperformed the S&P 500 by 4.5% to 0.9% in terms of total return, half the stocks lost while half the stocks won. The portfolio performance was primarily driven by OLN's very strong return followed by COP, which also had a double digit total return. Furthermore, none of the losers had double digit losses. AHGP showed the biggest decline of 6.7%.
OLN and Chemicals Show Strong Performance
The strong performance from OLN was possibly partially from the recently announced acquisition of The Lubrizol Corporation (LZ) by Berkshire Hathaway (BRK.A) providing uplift to the chemicals sector. OLN is now trading at its 2 year high and near its 5 year high which was around $30 per share.
Due to price appreciation its old dividend yield of 4.3% has now shrunk to around 3.2% which is still solid. In comparison to LZ, OLN has a 3.2% dividend yield compared to LZ's 1.1%. Its forward P/E ratio is slightly higher at 12.2x versus LZ's 10.8x.
OLN and LZ also operate in different subsegments within the chemical industry. LZ is a specialty chemical producer focused on performance improvement and additives for the transportation, industrial and consumer segments. Sample products include engine additives, oilfield chemicals, additives for coatings, polymer coatings, and chemicals for personal care products. OLN is divided into the Chlor Alkali products segment that manufactures chlorine, caustic soda, hydrochloric acid, and bleaches and the Winchester segment which makes various types of ammunition. The Chlor Alkali segment is about two thirds of OLN's revenue ($1,036 million for 2010 with $117 million in segment income) versus one third for Winchester ($549 million for 2010 with $63 million in segment income). While profits in both segments declined, the Chlor Alkali segment had growing revenue, while Winchester's revenue declined from 2009 results.
While these stocks show strong performance, I would probably look to sell OLN and capture the current appreciation.
Iron and Steel Stocks Lag
While the chemical industry showed solid performance in this portfolio, the two Iron & Steel Companies, NUE and SID both lagged behind SPY posting returns of -2.7% and -3.5% respectively. Digging further into SID suggests it might not be an appropriate stock for this portfolio given its shorter dividend history. The following table shows that its dividend has recently climbed higher in the past two years. Its next dividend announcement would be anticipated in the coming month.
|Date||Dividends||12 Months Dividend||Closing Stock Price||Implied Yield|
The dividend payments seem to be relatively consistent, but after the stock dropped substantially during the Great Recession as steel prices plummeted. Steel prices are now close to their 2008 highs; however, SID has not recovered.
In contrast, NUE shows a strong track record of quarterly dividends. While its dividends also peaked in 2007 and 2008 as steel prices were setting record highs, it has been showing a consistent recovering. It should be noted that its current dividend payments are still lower than in 2008. The table below shows this detail:
|Date||Dividends||12 Month Trailing Dividends||Closing Stock Price||Implied Yield|
With steel prices climbing back higher, one would hope that NUE would raise its dividend again and also show additional price appreciation. NUE is still trading significantly below its 2008 highs. I would continue to hold both of these stocks and sell on positive news if there was meaningful price appreciation. I've previously done a fundamental valuation for NUE that suggested potential upside.
Oil and Gas Stocks Track Higher with Increasing Oil Prices
Both Oil and Gas stocks, COP and CLMT climbed over the past two months. COP showed the second largest return at over 13%. CLMT had a more modest return of 1.7%. It should be noted that CLMT is a refinery operating in two segments: Specialty Products and Fuel Products. As such, it does not own any resources that should appreciate in value in the sense that COP does. In fact, CLMT uses crude oil and other hydrocarbon feedstocks as inputs to its product which range from solvents, waxes and lubricants to diesel, jet fuel and gasoline. This might even suggest a negative correlation to oil prices.
CLMT shows essentially no correlation (1.3% over the past 5 years) to the United States Oil ETF (USO), while COP shows around a 63% correlation. I would view both stocks as positive to a basic materials dividend portfolio.
AHGP Strong over the Previous Year
While AHGP was the worst performer in the group recently, it had posted a 50%+ return over the last year. AHGP produces and markets coal to utility and industrial customers. It operates mines in the midwest and applachian areas and has over 600+ million tons of reserves. It is trading at a forward P/E of 13.6x. It should also be noted that AHGP is a master limited partnership which can create some different tax implications. AHGP holds most of its operations in Alliance Resource Partners LP (ARLP).
|Date||Dividends||12 Month Trailing Dividends||Closing Price||Implied Yield|
The concern for AHGP is that it has had significant price appreciation above and beyond its dividend growth resulting in a declining yield. However, it has also shown strong net income growth and cash flow growth. It also appears at a quick glance to have strong financial metrics relative to its competitors which include Arch Coal Inc. (ACI), Peabody Energy Corp. (BTU), CONSOL Energy Inc. (CNX), Massey Energy Co. (MEE), and Westmoreland Coal (WLB). However, this will be the focus of a separate article.
This is a case where a more detailed fundamental analysis would be important to making an investment decision. There is also a question of whether it makes sense to hold the investment at the AHGP level or ARLP level.
Looking at Total S.A. as an Addition
While oil prices have risen dramatically over the past few months, they are still nowhere near their 2008 highs. Many oil stocks also offer attractive dividends, in order to replace OLN and possibly AHGP, one could consider Total S.A. (TOT). With relatively low valuation metrics (9x P/E), a solid dividend yield of 4.5% and good track record of historical dividend growth, TOT could be a solid addition. Other SA contributors have recently posted articles including David White. TOT declares dividends around May and November of each year. The following table shows recent historical dividends.
|Date||Dividends||Trailing 12 months of Dividends||Closing Price||Implied Yield|
TOT recently closed at $61.10 per share. For comparison to the other portfolio stocks it had 3.9% total return since February 11, 2011.
This basic material dividend portfolio appears to be strong. OLN having shown significant price appreciation might have become overvalued. TOT would be a good addition to this portfolio. AHGP having shown a declining yield and significant price appreciation over the past year may no longer be as attractive. However, recent questions around nuclear safety may help coal stocks which provide the other primary form of base load power in the United States.
Sources: All data pulled from Yahoo!Finance except for segment results for OLN which were from its 2010 10-K filing.
Disclosure: I am long SPY.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.