ChemTrade Logistics Income Fund

I do not own this stock (TSX-CHE.UN). I decided to investigate this sock after reading an article in the G&M about investing in small cap stocks that pay dividends. This was one of the stocks mentioned that I had never heard of before. Site I found this at is G&M article. This stock is also mentioned in Today’s small-cap stocks to watch in the Globe and Mail dated February 24, 2012.

This stock was an Income Trust stock. I have waited to do my review until after the December 2011 year-end report was published. The best thing to say about this stock is the total return has been very good. Total return for the last 5 and 10 year is 25.2% and 15.6% per year, respectively.

The portion of this total return attributable to dividends is 12.1% and 13.2% per year, respectively. So the portion of your total return attributed to dividends would be 48% and 85% per year, respectively. The high percentage of dividend return points to great dividends in the past and that the majority of money earned over the past 10 years came from dividends.

Dividend growth is not so straight forward. Dividend growth over the past 5 year is a negative 3.5% per year. Dividend growth over the past 10 years is quite good at 9.2% per year. This is a small company and as such the management has to be prudent in dividend payments. With small companies it is not uncommon for dividends to be decreased. For this company, dividends were decreased in 2007 and since then they have been flat.

The revenue growth per share over the past 5 and 10 years has been 5.1% and 11.2% per year. The 5 year growth in EPS is quite high because they had a year of bad earnings 5 years ago. The 4 year growth in earnings is probably more reliable at 24% per year. The 10 year growth in EPS is just 4%.

Growth in Cash Flow has not been great with the 5 and 10 years growth at 5.7% and 0% per year, respectively. Book Value growth is 2.2% per year over the past 5 years but there is no growth over the past 10 years. It is quite typical for Income Trust stocks not to grow their book value.

The debt ratios are a bit disappointing. The current Liquidity Ratio is 1.24. The 5 and 10 year median ratios are not much better. The current Debt Ratio is 1.47. For this ratio, the 5 and 10 year median ratios are much better at 1.68 and 1.74. I would be happier with this stock if the current ratios were at least 1.50. The current Leverage and current Debt/Equity Ratio are ok at 3.14 and 2.14, but are higher than what I would like to see.

The Return on Equity Ratio started to get to a decent value in 2007. The one for 2011 is quite good at 17.6% and the 5 year median ROE is also quite good at 18.6%. The ROE based on comprehensive income was good for 2011 at 19%, with a 5 year ROE lower, but still good at 14.2%.

When I look at insider trading, I find that there is some insider buying and no insider selling. The insider buying is across the board with CEO, CFO, officers and directors all buying, but the amount is not that high at $0.5M. A lot of the insider buying seems to be by a company plan. The company does give out options, but they seem to give them out sparingly. A lot of insiders seem to have trust units. The CEO has trust units worth $2.7M. There are 36 institutions holding 36% of the units of this company. There has been some, but not much buying and selling over the past 3 months with institutions increasing their holdings by 2.4%.

I get 5 year median low and high Price/Earnings Ratios of 7.40 and 12.98. The current one of 9.33 is between the median P/E Ratio of 11.72 and the low one of 7.40 and therefore points to a good current stock price. I get a Graham price of $18.29 and the current stock price of $16.88 is some 7.7% lower. The low and median difference between the Graham Price and Stock price is the Stock price being at 17.7% and 1.6% lower than the Graham price. By this measure the stock price is good.

I get a 10 year median Price/Book Value Ratio of 1.55 and the current one at 2.05 is some 32% higher. Part of the problem with this test is the low growth in Book Value. On an absolute basis 2.05 is not a particular high ratio, but it is not low either, but more to a reasonable level.

The last test I usually do is the Dividend Yield test. The current yield of 7.11 is some 31% lower than the 5 year median dividend yield of 10.26%. The 5 year median dividend yield is very high as is the current 7.1% yield. The stock price tests are rather mixed, but overall the price is probably closer to a reasonable one.

When I look at analysts’ recommendations I find Strong Buy, Buy and Hold. The consensus recommendation is a Buy. There is a buy recommendation with a 12 month stock price of $18.25. This would give you an 8.15% capital gain and 7.11% dividend for a total return of 15.23%. I see another buy recommendation with a 12 month stock price of $19.50 and therefore a 21.6% total gain.

This is an industrial stock and therefore it is very sensitive to the business cycle. No one seems to feel that that the dividend is in jeopardy. A number of analysts feel that the company is recovering well from the recession. One analyst said it was not the time to buy as the stock is fairly priced.

There is certainly money to be made in this company over the long term. The dividend yield is very good, but this is an Industrial company and it is affected by the business cycle. We do know that they will reduce dividends when they have too, but it is unknown if they will rise them also. They recently said that they intend to use excess cash to pay down debt and to grow. Debt ratios for this company are not great and it is probably prudent of them to want to pay debt down.

Income Trust companies tended to use cash for distributions rather than growth. However, corporations tend to use excess cash for growth as well as dividends. The company talks about supporting the current dividend, but not about increasing it.

ChemTrade Logistics Income Fund is a global supplier of sulphuric acid, liquid sulphur dioxide and sodium hydrosulphite and a processor of spent acid, particularly in the U.S. Gulf Coast region. Chemtrade is also a regional supplier of sulphur, sodium chlorate and phosphorus pentasulphide, and also produces zinc oxide at three North American locations. Its web site is here ChemTrade. See my spreadsheet at che.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.