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Is Olin Corp a Bargain?

- By Alberto Abaterusso

While screening the market for companies long track records of paying dividends, I came across Olin Corp. (OLN). Olin Corp. is a Clayton, Missouri-based producer of ammunition, chlorine and sodium hydroxide. The company distributes its chemical products in the U.S. and internationally.

Olin Corp. is a loyal dividend payer that has distributed payouts since 1985, though shareholders will have not seen a hike for over 24 years through Monday Dec. 10 when the company will pay a 20-cent cash quarterly dividend per share. It has a forward dividend yield of 4% according to the share price of $20.18 at close Friday. The forward dividend yield of Olin Corp. is compelling when compared to an industry median of 2.05% and to the S&P 500 index dividend yield of 1.99%.


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The dividend is underpinned by cash available on hand and equivalents of $156.7 million at Sept. 30, 2018. When the total cash on hand and equivalent is divided into about 166.84 million shares outstanding, it gives total cash per share of 94 cents, which will be sufficient to cover the annual dividend payment for the next five years.

The liquidity available in cash on hand and equivalents reflects a nearly 39% decline from the third quarter of 2017, following the repayment of $250 million worth of outstanding debt and the repurchase of roughly 500,000 ordinary shares for $16.8 million in the third quarter of 2018.

Long-term debt was about $3.34 billion at the end of the third quarter, compared to $3.66 billion a year ago. The total debt-equity ratio is 114% indicating a high leveraged balance sheet, but at the same time, the interest coverage ratio, which measures the ability of Olin Corp. to sustain the financial burden, is 2.95. Since the threshold is 1.5, the company appears not to face problems with the payment of interest expenses on the outstanding debt.

The other support to the dividend payment is coming from the cash flow from operations. The item is steadily increasing as it is shown in below chart of GuruFocus.com, and it has grown at a substantial 20.3% average pace every year over the last five years.

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Olin Corp.'s trailing 12-month operating cash flow of roughly $780 million was allocated on dividends payment and growth capital for a sizeable 45%.

Olin Corp. is stemming cash flow from a portfolio of operations that GuruFocus.com has rated with a high score of 8 out of 10 regarding the profitability and growth. The business of the company is structured in three divisions. These are Chlor Alkali Products and Vinyls, Epoxy and Winchester.

Revenues are also increasing. The average annual rate at which they have grown over the last five years is 25.3%.

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The company has reported $6.27 billion in full-year 2017, $1.71 billion in the first quarter of 2018, $1.73 billion in the second quarter of 2018 and $1.87 billion in the third quarter of 2018.

In the third quarter of 2018, the Chlor Alkali Products and Vinyls division increased 19.8% year over year and contributed to total revenues for 56%. The Epoxy division climbed about 32.1% year over year and gave about 35% to total revenues. Instead, the Winchester division lost 5.3% year-over-year and accounted for about 9.3% of total revenues. The increase in the third quarter total revenues was, compared to a year ago, a result of higher volumes and product prices despite higher raw material and freight costs, and lower sales of the Winchester segment's products to commercial customers.

The dividend payment does stand on solid financial pillars that have been created over time thanks to the strong position that Olin Corp. occupies in markets with long-term positive demand for caustic soda.

Should an investor be interested in either initiating a position or increasing their exposure to Olin Corp for the dividend, I recommend waiting untill the release of the next report, which will contain an update on the adjusted quarterly Ebitda. Why? Because the increase or decrease in this item can move the share price. This is what happened on Oct. 29 when the adjusted Ebitda of $398.3 million was reported for the third quarter of 2018. It reflected 50% growth from the prior year. Afterwards, the share price surged from $19.90 on Oct. 29 to $22.05 on Nov. 7, a 10.8% increase.

Since then, the share price has retreated to end of October levels and is objectively trading cheaply. However, since Olin is anticipating a decline in adjusted Ebitda from the third quarter because of seasonally weaker demand for several products, higher raw materials costs and lower caustic soda prices, a significant depreciation on the stock market may follow, creating a more convenient entry point. Olin Corp. forecasts that the adjusted Ebitda for 2018 will be of $1.235 billion to $1.285 billion.

The share price was $20.20 at close Friday, after a 42% decline for the 52 weeks through Dec. 7. The share price is below the 200-, 100- and 50-day simple moving average lines.

  • The 14-day Relative Strength Indicator is 41.76.
  • The market capitalization is $3.37 billion.
  • The 52-week range is $18.49 to $38.84.
  • Analysts foresee 40% upside from the share price at close Friday.
  • The price-book ratio is 1.16 versus an industry median of 1.83 and the EV-Ebitda ratio is 5.17 versus an industry median of 11.5.
  • Net earnings are estimated to grow 40.75% every year over the next five years.



Disclosure: I have no positions in any securities mentioned in this article.

This article first appeared on GuruFocus.