Corning: Buy Today For A 4% Yield On Cost By 2019

| About: Corning Inc. (GLW)


The company’s most recent quarterly revenue and profits exceeded expectations as it projected a demand recovery for its LCD glass and other parts of its business.

The company has also projected that it sees its first quarter 2016 results as the bottom for its results for 2016.

The company’s receipt of $4.8 billion in proceeds from its Dow Corning divestiture will serve as a catalyst to enhance shareholder value through acquisitions and share buybacks.

A purchase of the company’s shares now will provide investors with an almost 4 percent yield on cost based on the company’s projected dividend increases through 2019.

As investors wait to see what the company will do with proceeds from the Dow Corning divestiture, the company’s growing dividend will serve as an almost 4 percent baseline return.

Investors' reaction to Corning's (NYSE:GLW) latest earnings report was positive given that the company's quarterly results revealed that the expected strong weakness in the Chinese market was not as bad as feared. The company's shares surged when it reported revenue and profit per share that exceeded analysts' expectations and when it projected a demand recovery for its glass for television sets and other parts of its business. Investors were also enthused by the company's pronouncement that it sees first quarter 2016 as the bottom for its results for the year. We should note, however, that the company boosted its earnings growth through its previously announced (and now completed) accelerated share repurchase plan. Further, the company's plan to hedge against the fluctuation in the value of the Japanese Yen also protected its quarterly results. The company's overall performance, however, was weak with revenue growth coming mostly from its optical division and somewhat from its environmental technologies division. Profits decreased across the company's divisions with its specialty materials division indicating some improvement.

Specifically, GLW announced core earnings of 34 cents a share with net earnings of $429 million, a decrease from $630 million in the year-ago quarter. (Note: The company's "core" revenue and earnings are adjusted to exclude the impact of changes in the value of the Japanese Yen and the Korean Won. When including the impact of currency changes, earnings would have been 17 cents a share.). The company recorded revenue of $2.23 billion, a 7.2 percent decrease from the year-ago quarter. Core revenues were higher at $2.40 billion. The company's display technologies division (about 33 percent of total revenue) recorded a 21 percent revenue decrease from the year-ago quarter due to LCD glass volumes decreasing slightly and price decreases moderating. The company's optical communications division (about 33 percent of total revenue) recorded an 8.9 percent revenue increase from the year-ago quarter. The company's environmental technologies division (about 12 percent of total revenue) recorded a 1.6 percent revenue increase from the year-ago quarter. The company's specialty materials division (about 13 percent of total revenue) recorded a 13.8 percent revenue decrease from the year-ago quarter. The company's life sciences division (about 9 percent of total revenue) recorded a 6 percent revenue decrease from the year-ago quarter. As noted above, only the company's optical and environmental technologies divisions showed revenue growth for the quarter.

While investors were excited about GLW declaring that first quarter 2016 would be the company's weakest quarter of the year, they were even more focused on the company anticipating that growth would recover in subsequent quarters. In particular, investors were encouraged by GLW's anticipation of a moderation of LCD glass price decreases that it expects to continue into 2016. With the global economic environment experiencing weakness and the Chinese economy in turmoil, we see investors' bidding up of GLW's shares since the company's latest earnings announcement as an acknowledgment that GLW is managing its business well in a very difficult global environment. Despite the modest run-up in GLW's shares since the company's latest earnings announcement, however, we believe that there is still time to invest in the company's shares for the intermediate and long term. To current and potential GLW investors, we have been highlighting in the past and continue to highlight that investors need to look past near-term analyst revenue and earnings projections when evaluating the company's investment prospects.

To us, we see an investment in GLW as recognizing the known and unknown about the company. The "known" is the company's projected performance in the near term based on current product offerings and the global economic environment. The known is also the transformative actions GLW has taken in recent years. For example, the company has engaged in acquisitions of various sizes to enhance and strengthen each of its divisions. In addition, the company announced the divestiture of its over 70-year-old joint venture Dow Corning to Dow Chemical (NYSE:DOW) for $4.8 billion that will be essentially tax-free. Finally, the last and latest known is the company's announced capital allocation plan. We see such "knowns" as the beginning of the process of thinking about investing or continuing to invest in GLW shares. As noted below, the most significant near-term "known" is GLW's stated roadmap of dividend increases through 2019 that will give investors a 4 percent yield on cost based on the company's current share price.

The "unknowns," however, to us are why we are excited to continue to own GLW shares despite the company's range bound trading in recent years. Analysts base their opinions on modeled "knowns" such as existing products, announced products, sizes of end markets, pricing issues and global economic circumstances. We believe, however, that the "unknown" of what GLW will do with the proceeds from its divestiture of its portion of the Dow Corning joint venture will be the driving positive catalyst for the company's shares in 2016. At present, analysts and investors do not know what GLW intends to do with the $4.8 billion in proceeds that it will receive for its sale of its interest in the Dow Corning joint venture. It is likely, however, that GLW is likely to use such proceeds for a mix of share buybacks and small bolt-on acquisitions to strengthen one or more of its divisions. We believe that such "unknowns" will become positive catalysts for GLW's shares as the company announces its plans for spending the proceeds from its Dow Corning divestiture. For now, however, the company's announcement of anticipated dividend increases through 2019 is reason enough to consider the company's shares.

Buy shares today for a 4 percent yield in 2019

In early February 2016, GLW raised its dividend 12.5 percent from a .48 per share annual dividend to a .54 per share annual dividend. Subsequent to such dividend increase, the company's shares yield almost 3.0 percent. The best, however, is yet to come for GLW shareholders. In a likely response to shareholder frustration with GLW's lackluster share performance, the company announced a capital allocation plan in recent months to reward such shareholders that stick with the company over the intermediate and long term. In particular, GLW indicated its plan to increase its dividend per common share by at least 10 percent annually through 2019. So what does this plan mean for current shareholders? Well, with the recent 12.5 percent dividend increase now in the rear view mirror, it means that investors can expect a dividend increase of at least 10 percent in early 2017, 2018 and 2019. Let us assume for this example, however, that GLW increases its dividend in each year at the 10 percent level rounding up to the nearest cent. As such, a .56 annual dividend in 2016 would become .62 in 2017, .68 in 2018 and .75 in 2019. With such dividend increase roadmap in mind, if investors purchased GLW shares at the price as of the writing of this article, their yield on cost would be about 4 percent. In a global low interest rate environment, we believe that ownership of GLW's relatively stable shares will reward investors with a significant yield on cost in the near future while the company's works to transform itself to achieve more consistent and stable revenue and earnings growth. If we did not own GLW shares currently, we would be buying them on any market weakness to collect such 4 percent yield on cost by 2019. Starting with a base level 4 percent yield on cost in our mind is a significant ingredient for a recipe of long-term investment success for any investment.

Our view

Sagging GLW earnings estimates have been disappointing to say the least. The company has been unable to amass multiple years of consistent earnings growth without setbacks, and, as such, the company's share price performance has suffered by trading within a price range of about $10 to $25. Long-term shareholders are exceedingly frustrated with the company's performance and company management appears to recognize such frustration by finally taking significant actions to reward shareholders who stay long the company's shares. For example, the company has indicated that it has made progress on its new capital allocation plan under which it will return $10 billion to shareholders in the form of share buybacks. It is also investing another $10 billion over the next 4 years to build out its product portfolio. The buildout of the company's product portfolio is especially significant since the company's results are overly reliant on its profitable but price sensitive LCD glass business. The sooner the company can minimize the effect of LCD glass prices on the overall company's results, the better for the overall performance for the company and its shares.

GLW's increasingly significant transformative steps will benefit investors over the intermediate and long term. The company's announced Dow Corning divestiture is the most significant step taken by GLW to date to boost shareholder returns. GLW's businesses face near-term headwinds of adverse foreign currency effects and a weak Chinese economy. Economic conditions, however, do change over time and so too will the conditions in China improve as the Chinese government takes the needed structural steps to improve economic conditions in that market. With regard to adverse currency effects, our experience is that they are never as adverse for as long as analysts or "experts" expect. Ultimately, we believe the company's internal innovative research and development program, its ongoing acquisitions to diversify its revenue and profit base, and its increasing dividend and significant share buybacks will reward shareholders. We also believe its strategy to expand and strengthen each of its divisions through new product introductions will drive revenue and earnings growth, and therefore, shareholder returns.

GLW's forward price-to-earnings ratio is about 12.70, based on 2016 earnings estimates of $1.39 and 11.45 based on 2017 earnings estimates of $1.61. The current dividend yield is about 2.95 percent. We believe potential investors should initiate a position in the shares during the next overall market sell-off for long-term rewards in the form of dividend increases, share buybacks and share price appreciation. We also believe potential investors should note that in September 2015, a GLW insider purchased the company's shares at $16.67, for a total cost of $597,119. A long-term GLW investor will recognize that the steps being taken by the company are aggressive in nature, and appear to be in response to investor frustrations. In particular, long-term investors have been frustrated that the company has been unable to grow revenue and earnings in a steady and consistent manner over the intermediate and long term. Those with a long-term investment horizon need to understand that the near-term transformative actions taken by the company are more likely to show positive results over the intermediate and long term. Despite the near-term challenges GLW is experiencing, we see the company's innovative research and development abilities, transformative actions and capital allocation plans as significant for driving more consistent returns to investors through dividend increases, share buybacks and share price appreciation over the intermediate and long term. For now, however, new investors can collect a 4 percent yield on cost by 2019 if they purchase the company's shares today based on GLW's stated roadmap of dividend increases. A base line 4 percent return, not even considering the effect of company's transformative actions on its share price, is a great place to start for any investment.

Disclosure: I am/we are long GLW, DOW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.