Are you looking for a stock that gives growth and an over 6% dividend yield? Here is a small-cap stock that could give you both in the coming years. Chemtrade (TSX:CHE.UN), as the name suggests, trades in chemicals used in various industries like energy, pulp and paper, water treatment, and semiconductor manufacturing.
The stock fell 60% in the March 2020 dip and halved its distributions as industrial production slumped due to lockdowns. But the stock has rallied 60% since January 2021, driven by a recovery in its core verticals, oil and gas.
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Chemtrade’s improving fundamentals
Chemicals are commodities, which means their price is determined by demand and supply. A company’s profits depend on its production costs. The Russia-Ukraine war disrupted global supply chains and boosted commodity and energy prices. It worked in Chemtrade’s favour as its access to low-cost electricity gave it a pricing advantage over its European counterparts.
Increased demand and prices turned Chemtrade’s pandemic losses into profits. Unlike oil companies that increased their dividends in 2022, Chemtrade maintained its dividend rate at the pandemic level and used the 2022 profits to reduce debt.
The company also sold idle assets to pay down its long-term net debt, which had reached 6 times its adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) in September 2021. It has reduced this ratio to 2.4 times and plans to reduce it further with some more asset sales.
Chemtrade’s dividend income
The growing revenue from rising demand and improved profitability from high chemical prices improved Chemtrade’s dividend payout ratio to 32% from 79% in September 2021. The company has been paying regular monthly dividends since 2017. It slashed its dividend in 2020 to preserve capital during the slow industrial production from pandemic-induced lockdowns. The stock price recovered but is trading 10% below the pre-pandemic level, which has enhanced the distribution yield to 6.28%.
Looking at the improved cash flows from oil and gas recovery and secular growth (discussed below), the company might increase its dividend in the future. But a recessionary environment could slow its 2023 adjusted EBITDA to $370 million compared to $425 million in 2022.
Chemtrade to benefit from secular growth
However, Chemtrade is all set to drive the economic recovery rally with its chlor-alkali products, including:
- Caustic soda used in lithium-ion batteries
- Ultrapure acid used in semiconductor manufacturing
- Regen acid used in the petroleum industry
The United States is increasing lithium-ion battery and semiconductor production. It is also increasing natural gas production as North America becomes the biggest natural gas exporter to Europe after the ban on Russian natural gas.
Chemtrade will benefit from increased demand for the above chemicals as its consumer industry verticals ride the 5G and electric vehicle (EV) trend. The company also has a presence in the future of transportation as it produces green hydrogen through sodium chlorate and chlor-alkali manufacturing processes. Once the adoption of green hydrogen begins, Chemtrade could expand its capacity and ride that wave, too.
How to invest in this stock?
The strong fundamentals and growth opportunities make Chemtrade an attractive stock to buy. But it is a small-cap stock that comes with the risk of liquidity and high volatility. CHE stock is sensitive to competition from big players. The company previously had high exposure to the oil and gas industry. But reduced capital spending in the industry encouraged the company to diversify its portfolio and tap new industries.
Chemtrade stock could grow your money in the next two to three years as EV momentum kicks in. But invest a small portion in it, and book timely profits as the stock could fall until the next secular trend arrives. By investing in other mid- and large-cap stocks, you can reduce the portfolio risk.
