Dividend Investor Portfolio #22: Advantageous Materials
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Dear Investor,
Welcome to the 22nd edition of TipRanks’ Dividend Investor Portfolio & Newsletter. In this Newsletter, we are excited to announce a new addition to our Portfolio. But first, let us present you with some important market and Portfolio news, as well as a new income stock recommendation.
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Market-Moving News: August 19, 2024
Stock markets locked in their best week since November, snapping a streak of four weeks of declines. The Dow Jones Industrial Average (DJIA) rose 2.94%, while the S&P 500 (SPX) jumped by 3.93%. Tech shares regained their lead, with the tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) surging by 5.29% and 5.38%, respectively.
After the previous weeks’ sell-off, led by investor fears over the odds of a hard landing, new data reflecting consumer strength and falling inflation brought back the “Goldilocks” economic scenario, encouraging market participants. A resurgence of economic optimism emboldened “dip buyers,” specifically in the technology sphere.
This week will feature the release of the Federal Open Market Committee (FOMC) meeting minutes from the Fed’s last policy meeting three weeks ago. Although these minutes are important, the headline event will be Fed Chair Jerome Powell’s speech at the annual Jackson Hole symposium.
Powell is expected to lay the foundation for the impending monetary policy easing, supported by the data revealing a softening job market and the deceleration of inflation toward the central bank’s target. With the first interest-rate cut since March 2020 almost a certainty for September’s meeting, the main topic of discussion on Wall Street is now the pace of the easing process.
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This Week’s Quality Dividend Stock Idea
Eastman Chemical Co. (EMN) is an American specialty materials company headquartered in Kingsport, Tennessee. The company, established in 1920 to produce chemicals for Kodak, spun off and became an independent corporation in 1994.
Since then, EMN has grown into a global specialty chemicals supplier with a presence in more than 100 countries and 36 manufacturing sites worldwide. With a market capitalization of $11.4 billion and annual revenues of $9.2 billion, Eastman ranks #426 on the Fortune 500 list. EMN is one of the largest and most diversified specialty chemicals companies worldwide.
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Well-Diversified Global Business
EMN generates the majority of its sales outside of the United States, although with 43% of revenues the U.S. is its largest single geographical end market. The global breakdown comes to about 28% from EMEA, some 24% from APAC, and about 5% from Latin America.
Eastman’s business is also well-diversified by products, and roughly two-thirds of its revenue comes from products in which it has a leading market share. The company has sold several noncore businesses during the past several years, choosing to focus on higher-margin specialty product offerings. However, the divestitures were far outweighed by internal product development and acquisitions, leading to the expansion of its product offerings.
Eastman produces over 1,000 products, ranging from coatings and fibers to organic acids and aviation fluids, as well as a broad range of advanced materials, additives, and functional products. EMN’s products are used virtually in all industries and various applications.
Transportation is Eastman’s largest end market, where the company derives about 18% of revenues, followed by 12% from Filter Media (products for filtration and purification) and 11% from Building and Construction. The rest comes from Durables and Electronics, Consumables, Agriculture, Industrial Chemicals, Personal Products, Medical and Pharma, Water Treatment and Energy, and other markets.
Eastman Chemical Co. is more diversified than most of its comparable peers, including Albemarle, Westlake Chemical, NewMarket, Akzo Nobel, and others, standing second only to the materials giant Dow Inc.
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Stable and Reliable Dividends
Eastman Chemical Co. has paid dividends since its spin-off from Kodak in 1994. Eastman’s current dividend yield stands at 3.3%, way above the average for the Materials sector.
With its reasonably low earnings-based (43%) and FCF-based (63%) payout ratios, EMN’s dividend payments are well-covered by earnings and free cash flows, leaving the company with ample room for further dividend growth, while having sufficient capital for R&D investments and M&A activities. These metrics add to Eastman’s strong dividend stability and reliability status.
The company takes pride in a 14-year track record of consecutive annual dividend increases, which make it a “Dividend Contender.” EMN’s payouts have grown at a CAGR of 9% over the past decade. The company’s latest dividend increase, amounting to 2.6%, was in December 2023; payout history shows that the next increase is expected to occur this December. Moreover, analysts expect the company to continue raising its payout at about a 2.5% annual rate for the foreseeable future.
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Supported by Robust Financials
Eastman’s dividends are supported by its strong balance sheet and robust financials and liquidity. Although the company’s net debt-to-equity ratio of 80% is considered high, EMN has succeeded in reducing it significantly over the past five years. The debt is well-covered by operating cash flow, while interest payments are well-covered by EBIT. Eastman’s low-risk debt profile is underscored by its high credit ratings: “BBB” at S&P Global Ratings and “Baa3” at Moody’s.
EMN’s broad product and end-market diversification and wide geographical reach increase its revenue stability, spreading risk across economic cycles. However, the company operates in a highly cyclical industry impacted by macroeconomic factors, specifically when it comes to its exposure to transportation, construction, and consumer durable products. In addition, EMN depends on a wide variety of inputs, such as natural gas and oil. Despite these factors, Eastman has demonstrated higher margin stability than many of its competitors. Its healthy margins support solid annual operating cash flow generation and indicate relatively low operational risk.
The company suffered a difficult period in 2022-23 as many of its customers destocked following a post-pandemic restocking rush. However, it ended 2023 on an upbeat note, delivering strong operating cash flows and expanding margins. The company reduced costs and leveraged the strength of its value proposition to raise prices and offset significant macro-driven volume challenges. In 2023, Eastman’s free cash flows dipped due to a challenging operating environment alongside the elevated capital spending related to the construction of a recycling facility. However, these strongly rebounded in 2024.
In Q2 2024, EMN returned to year-over-year revenue growth, reporting a 2% increase in sales despite continued weakness in the building and construction end markets. Growth was led by the higher-margin Advanced Materials segment, the company’s largest source of revenue. EPS rose by over 8% year-over-year, while gross margin expanded to 25.3%, operating to 15.4%, FCF margin to almost 11%, while net profit margin rose to 9.7%. Meanwhile, cash provided by operating activities came in at $367 million. During the quarter, the company reduced its debt by $200 million.
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Profiting from Circular Economy
Eastman’s recycling facility – the methanolysis plant which reduces hard-to-recycle waste plastic to its original molecular state for reuse in plastic production – is a part of the company’s strategy to become a circular (recycling and reuse) economy leader. The methanolysis facility in Kingsport, Tennessee started generating revenue in March this year; the company estimates it would deliver approximately $75 million of incremental EBITDA through 2024.
As the company continues to witness surging demand for recycled material at virgin-quality levels, it announced a second molecular recycling facility will be built in Longview, Texas. The Longview project is part of Eastman’s commitment to invest more than $2 billion in molecular recycling facilities that process hard-to-recycle plastics. Besides the environmental factors and the eligibility for U.S. Department of Energy (DOE) funding under the Infrastructure Law and Inflation Reduction Act, these projects will significantly reduce costs, expand EMN’s production capacity, and support revenue growth.
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Total Return in Focus
Eastman Chemical Co. states its priorities for uses of available cash as follows: organic growth investments, payment of the quarterly dividend, bolt-on acquisitions, and share repurchases. Under this strategy, the company performed buybacks for $150 million during 2023 and repurchased $100 million worth of shares in H1 2024. EMN said it expects to repurchase shares worth around $300 million in 2024, more than was previously penciled in.
The increased buybacks are expected to add further support to Eastman’s share price. EMN stock has risen by almost 17% in the past 12 months, far outpacing the Materials Select Sector SPDR Fund (XLB). Top Wall Street analysts foresee an average upside of ~17.5% for the stock in the next 12 months.
Despite the outperformance versus its sector, EMN remains very reasonably valued, with its current and forward PEs significantly below the Materials sector averages. The company’s valuation comes at the bottom of the scale for its comparable peers in the U.S. Chemicals industry. Moreover, based on its forecasted cash flows, Eastman appears undervalued by about 40%.
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Investing Takeaway
Eastman Chemical Co. is one of the largest specialty chemicals companies worldwide. Its wide product, end-market, and geographical diversification increase its revenue stability and decrease operational risks. EMN’s conservative capital strategy, focused on debt reduction, supports its financial health, alongside robust cash-generation capability. The company’s investment in recycling plants supports its long-term outlook for stable revenue growth, underpinning its shareholder-return outlook and adding to its investment case. EMN is currently trading at an attractive valuation, adding value proposition to the income-investment one. Therefore, we view Eastman as an attractive addition to long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ Kroger (KR) has announced plans to invest $1 billion in price cuts if its proposed merger with Albertsons is approved by the regulators. This is double the amount the grocer previously pledged to devote to support customers with savings in grocery prices.
¤ BlackRock (BLK) has seen significant inflows into its spot Ethereum and Bitcoin ETFs, which have now reached a total AUM of $22 billion. The inflows were strongly supported by hedge funds, as institutional demand for cryptocurrencies continues to grow. This has made BlackRock the largest provider of publicly listed crypto products.
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Recent Trades
We are happy to announce a new addition to our Portfolio. We are adding EOG Resources (EOG), which we recommended in our newsletter on July 15th.
EOG is North America’s third-largest independent (non-integrated) crude oil and natural gas exploration and production company, focused on being among the highest return, lowest cost, and lowest emissions producers.
EOG has a strong presence in all the major and the most productive U.S. shale basins, such as the Permian, Anadarko, Barnett Shale, Bakken, DJ, Appalachian, Eagle Ford (discovered by EOG and ConocoPhillips in 2010), and others. EOG Resources is a leading player in the Permian Basin with over 660K barrels of oil equivalent per day, capitalizing on its extensive resource acreage in the region. The Permian Basin is especially important, as it is America’s leading oil region.
EOG’s business model is extremely effective. After acquiring significant acreage in the most productive U.S. basins at the dawn of the shale boom, it continues to play the “early mover” card, preferring to grow organically and concentrate on previously unknown or overlooked hydrocarbon plays at low prices. Besides the accumulation of vast acreage with strong production potential without the need to take on heavy debt loads, following this early-mover strategy has allowed EOG to optimize its exploration, development, and total operating costs, improving margins.
EOG checks all the boxes on financial health, capital efficiency, and profitability metrics. In stark contrast with most energy producers, the company has more cash than its total debt. The company takes pride in its robust ROE, ROA, and ROIC metrics, which come in the top 10% of its industry. EOG’s operating, FCF, and net profit margins are also considerably higher than average for its peers, indicating outstanding operational efficiency and profitability.
EOG Resources pays strong attention to its cash generation, targeting a total free cash flow increase of $22 billion in 2024-2026. This target looks conservative given that in Q1 2024 alone the company generated $5.1 billion in free cash. This is an important figure for EOG shareholders, as the company intends to distribute at least 70% of its FCF through dividend payments and buybacks.
Dividend payments are EOG’s stated number one capital allocation priority. The company has been paying dividends over the past 26 years, never suspending or reducing payouts. EOG’s current dividend yield stands at 3.95%, higher than the average for the Energy sector. The company’s dividend-per-share grew at a CAGR of 32% in the past five years and is expected to surge by over 34% in the next fiscal year. This outlook is supported by EOG’s production growth, efficient operations, vast reserves, and commitment to shareholder returns.
EOG stock trades at very attractive valuations, carrying about a 15% discount to the Energy sector’s average P/E ratio and coming in the middle of the valuation range for U.S. independent oil and gas producers.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.59% | +10.21% | $3,821.72 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Sep 10, 2024 | Oct 03, 2024 | 2.16% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Aug 16, 2024 | Sep 06, 2024 | 2.62% | $9.00 |
| BlackRock (BLK) | Sep 09, 2024 | Sep 23, 2024 | 2.41% | $20.40 |
| Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 3.97% | $3.12 |
| EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.04% | $4.60 |
| Kroger (KR) | Aug 15, 2024 | Sep 01, 2024 | 2.12% | $1.28 |
| LyondellBasell (LYB) | Aug 30, 2024 | Sep 05, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Sep 12, 2024 | Oct 10, 2024 | 4.59% | $5.20 |
| Qualcomm (QCOM) | Aug 29, 2024 | Sep 20, 2024 | 1.85% | $3.40 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
