Chemtrade Logistics Income Fund (TSX:CHE.UN) is a $960 million diversified industrial chemicals and services group that’s fired up in 2023. The company promises to surpass prior earnings records seen in 2022 and it’s generating boatloads of cash flow this year. Dividend investors may earn a 7.3% yield from the fund’s monthly dividends. Given the company’s recent performance, the monthly dividend stock’s paycheques look safer, with increasing room for growth.
As a highlight, the company paid out just 22% of distributable cashflow in the 12 months to June 2023, and management has raised earnings guidance twice this year.
Chemtrade Logistics maintains impressive earnings growth momentum in 2023
Chemtrade Logistics is one of the largest suppliers of sulphur products and services, water treatment chemicals, and electrochemicals in North America. It reported record operating earnings in 2022, and the company has raised its earnings guidance twice in 2023 as its business outperforms management’s expectations.
Subsequent to reporting record adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) of $430.9 million for 2022, Chemtrade Logistics is on course to surpass prior year records this year.
On October 10, the company raised its financial outlook for 2023 for the second time this year, as market conditions in its geographical territory are proving to be “more favourable than previously anticipated.” Chemtrade Logistics raised its 2023 adjusted EBITDA outlook from $450 million to more than $475 million in October.
The company had previously raised its 2023 outlook in June following a record first half of the year. Its second-quarter net income surged by 151% year over year to $87.3 million and distributable cash flow jumped 268% year over year in June, on quarterly revenue of $470 million, which was only 5% higher year over year.
Growing corporate earnings and cash flow
The company’s diversified industrial chemicals business has seen steady revenue growth and strong margins for some chemical groups, including sodium chlorate whose expanding margins accounted for 80% of the company’s electrochemicals segment’s year-over-year improvement in gross earnings during the second quarter.
Moreover, revenue has benefited from higher pricing in water solutions products and higher sales volumes in some product groups, which remained above historical levels going into the third quarter. Margin expansions and lower operating costs are boosting the company’s performance.
Should you buy Chemtrade Logistics stock for its 7.3% monthly dividend yield?
Chemtrade Logistics’ recent performance warrants a second look from dividend investors. Although management cut the dividend by 50% during unprecedented industrial production disruptions caused by the COVID-19 pandemic, strong free cash flow generation during the second quarter of 2023 signals growing capacity for sustained high-yield monthly dividend paycheques.
The company’s distributable cash flow surged by midyear. Its distributable cash flow payout ratio for the 12 months to June 2023 was 22% of free cash flow. Chemtrade Logistics’ monthly dividend is well covered by its internally generated distributable cash flow today. The payout is increasingly safer, and the company has growing capacity to self-finance accretive organic growth projects.
Most noteworthy, Chemtrade Logistics’ diversified business is significantly defensive. For example, demand for its water treatment chemicals and sulphuric acid services remains stable during recessions. Further, the company’s critical chemicals supply to semiconductor manufacturers should grow as North America brings silicon production onshore in an attempt to decouple its strategic economic value chains from China.
The future looks promising for Chemtrade Logistics’ business, and investors may enjoy some capital gains while earning recurring juicy passive income yields on monthly dividends.
Even better, investors could take advantage of the company’s dividend reinvestment plan (DRIP) and earn a 3% bonus as they reinvest their monthly dividends while avoiding trading costs.
