Investing in monthly dividend stocks can help you earn a steady and recurring stream of passive income. There are a few dividend stocks trading on the TSX that pay shareholders a monthly dividend. One such company is Chemtrade Logistics Income Fund (TSX: CHE.UN), which offers you a tasty dividend yield of 7.4%.
Despite its high dividend yield, Chemtrade Logistics has trailed the broader markets by a wide margin in the past decade. Since February 2014, Chemtrade stock has returned -3.8% to shareholders after adjusting for dividends, as its stock prices have declined by 57% in this period.
We can see that just investing in a company solely based on its dividend yield is not a good strategy. It’s crucial to analyze Chemtrade’s financials to see if it can grow its earnings, cash flows, and dividends over time and outpace broader market gains in the process.
An overview of Chemtrade Logistics Income Fund
Valued at a market cap of $1.02 billion, Chemtrade Logistics Income Fund provides industrial chemicals and services essential to companies across business segments such as gasoline, motor oil, fine paper, metals, and water treatment industries. It has two primary business segments that include the following:
SWC: Here, it manufactures and markets sulphur-based products and specialty chemicals to the North American market. Chemtrade is among the largest suppliers of industrial sulphuric acid in North America.
Electrochemicals: This business segment manufactures and markets sodium chlorate and chlor-alkali products. Chemtrade is a leading supplier of sodium chlorate in Canada and Brazil, where it is used as a bleaching agent for industries such as pulp and paper. The company’s chlor-alkali products support processes in industries such as steel, oil & gas, and water treatment.
How did Chemtrade Logistics perform in Q3 of 2023?
Chemtrade reported revenue of $483.5 million in the third quarter (Q3) of 2023, 7% lower than the year-ago period. The company attributed its sales decline in Q3 to lower prices for sulphur and caustic soda. Despite falling top-line growth, Chemtrade’s focus on improving its cost structure allowed it to report adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $142.1 million in Q3, an increase of 3.7% year over year.
Its distributable cash after adjusting for capital expenditures stood at $86.5 million, 4.8% higher than the year-ago period. Given its monthly dividend payout of $0.05 per share in Q3, Chemtrade has a payout ratio of 22%, which is quite low.
In fact, Chemtrade recently raised its monthly distribution by 10% to $0.055 per month, indicating a payout ratio of 45% at its midpoint guidance for 2024.
What’s next for Chemtrade Logistics Income Fund stock?
Chemtrade’s balance sheet has significantly improved in the past three years as it ended Q3 with a net debt-to-adjusted EBITDA ratio of 1.7 times, down from 2.2 times at the end of 2022. The company raised its adjusted EBITDA guidance to exceed $490 million in 2023, a record for Chemtrade.
In 2024, Chemtrade plans to invest between $60 million and $90 million in growth projects, which should drive future cash flows higher. But as demand for chemical products is cyclical, Chemtrade is forecast to report adjusted earnings of $0.85 per share in 2024, compared to earnings of $1.61 per share in 2023.
Chemtrade Logistics’s volatile earnings base makes it a high-risk investment, despite its dividend yield. While the stock has reported record EBITDA in the last three quarters, its stock is still down 12% since February 2023.
