Eastman Chemical (EMN); A solid 11% dividend increase & low valuation

Eastman Chemical’s (NYSE:EMN) dividend was increased by a solid 11% last week. Its overall yield is 2.63%. The firm started paying a dividend in 1994.

Eastman Chemical is one of the largest manufacturers of chemicals and plastics. It was founded in 1920 to originally produce chemical products for Eastman Kodak. The firm is a global producer, with over half of all sales outside the U.S. It operates in five key segments including Adhesives & Plasticizers, Additive & Functional Products, Advanced Materials, Fibers, and Specialty Fluid & Intermediates. Eastman Chemical was founded in 1920 and is headquartered in Kingsport, Tennessee.

Eastman Chemical has maintained a solid three-year growth rate of dividends of 13.8 percent. Eastman Chemical currently ranks 2nd in yield within the large cap basic materials, chemicals-major diversified category. The quarterly dividend for the January payment will be $0.51 versus the prior year rate of $0.46 per share. Eastman Chemical Company is a member of our Top 100 Dividend Stock List (see below).

The dividend will be paid at the new higher rate on January 3, 2017, to shareholders of record at close of business on December 15, 2016. Eastman Chemical is currently priced at $75.41. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
12/15/2016 0.51
9/13/2016 0.46
6/13/2016 0.46
3/11/2016 0.46
12/10/2015 0.46
9/10/2015 0.4
6/11/2015 0.4
3/12/2015 0.4
12/11/2014 0.4
9/11/2014 0.35
6/11/2014 0.35
3/12/2014 0.35
12/12/2013 0.35
9/11/2013 0.3
6/12/2013 0.3
3/13/2013 0.3
12/13/2012 0.3
9/12/2012 0.26
6/13/2012 0.26
3/13/2012 0.26
12/13/2011 0.26
9/13/2011 0.26
6/13/2011 0.235
3/11/2011 0.235
12/9/2010 0.235
9/9/2010 0.22
6/10/2010 0.22
3/11/2010 0.22

Quantitative Analysis:

We examine Eastman Chemical upon our five key criteria, which include; 

Category Value Score
Dividend Yield 2.71% 180
Dividend Growth (3 to 6 year avg) 13.2% 158
Forward P/E 10.56  31
S&P Financial Rating BBB 160
Beta  1.30 200
Total Score   729

Additional quantitative information on P/S ratio and historical yield;

% Yield 3 Year Div. Growth Rate 6 Year Div. Growth Rate SPS 2016 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr lowest Yield % 5 yr max Yield %
2.63% 13.8% 12.7% 62.6 1.15 0.55 1.35 1.42% 2.96%

Positives;

  • Eastman Chemical maintains an investment grade credit rating and its current dividend yield (2.63%) is above its five-year average of 2.14%.
  • Eastman Chemical has maintained a 3 year growth rate of dividends of 13.8 percent.
  • Eastman Chemical’s dividend yield is above that of the S&P 500 Index.

Negatives;

  • Eastman Chemical is trading above its ten-year average price/sales (P/S) ratio.
  • Eastman Chemical maintains a beta of 1.30, much higher than the average company.

Latest Earnings & Overall Analysis:

Eastman Chemical issued its earnings data on October 27th. The company reported $1.86 in earnings per share for the quarter, beating the consensus estimate of $1.67 by $0.19. In the previous quarter, it posted $1.84 in earnings.  The chemical firm posted revenue of $2.29 billion for the quarter, nearly in line with estimates. However, Eastman Chemical’s revenue for the quarter was down 6.5% on a year-over-year basis.  Overall sales was effected by a reduction in revenue from its Fiber Division. Revenue declined slightly year on year due to lower selling prices and lower Fiber sales volume.  On the positive side, sales growth from the Advanced Materials division was up by 2% year over year to $638 million as higher sales volume of premium products more than offset lower selling prices due to reduced raw material and energy costs.  Eastman Chemical debt is rated investment grade at BBB. The firm ended the quarter with cash of $207 million.  However, total debt for the firm fell by over 5%.  Eastman Chemical also bought back stock worth nearly $75 million during the last three months.

Eastman Chemical future growth potential is based upon improving its legacy chemical products and future acquisitions. Acquisitions have been a key element to it success. It bought Solutia in July 2012.  The $5 billion acquisition enhanced  Eastman’s growth strategy to increase revenues and profit margins through more specialty products and adding new markets. Solutia had emerged from bankruptcy in 2008 and generated nearly one-third of its revenue from Asia. With the acquisition, Eastman expanded its higher margin specialty plastics and wood applications businesses.  Solutia also placed Eastman Chemical into the automotive and solar areas.  Eastman Chemical then followed up the Solutia acquisition with the purchase of Taminco for nearly $3 billion.  Taminoco was a producer of alkylamines, adding to the specialty product category for Eastman Chemical. It added complimentary products in feed and agriculture, already a strong market for Eastman Chemical.  Other acquisitions in 2014 included BP Aviation Turbine Oil Business,, Knowlton Technologies, and LLC Commonwealth Laminating & Coating.

In most all of their divisions, Eastman Chemicals has top ranked products. In the Advanced Materials division leading products include Copolyester, PVB, Branded window films, and Cellulosic polymers. All rank #1 in their respective category. There is room for growth as consumers continue to shift to BPA free plastics, which Eastman Chemical specializes in. Within automotive, their cabin noise reduction products and head up displays offer attractive growth prospects.  In the Additives & Functional Products division the firm is also positioned well. It has a top market share in hydrocarbon resins, aviation fluids, insoluble sulfurs, and aldehyde derivatives & ketones.  The transportation sector accounts for nearly one-third of all sales in these two primary divisions.

Acetate tow and yarn is also major products for Eastman Chemical.  Used for cigarette filters, the revenue has accelerated in recent years as both China and Russia continue to increase smoking rates. Most of the sale of acetate tow come from foreign markets.  While growth in the U.S. is modest, positive growth from non-Western countries continues. Nearly 75% of all sales are from outside the U.S. This is a high margin business for Eastman Chemical.  The firm maintains market share of about 27%. The firm opened a  joint venture (JV) with South Korea based SK Chemicals recently. This increased capacity to nearly 200,000 tonnes/year of Acetate tow.

Eastman Chemical’s management team has also put emphasis on cost savings not just through acquisitions, but also through internal measures. The chemical firm is looking to reduce at least $100 million of costs next year, which would match this year’s reduction. In addition, the firm recently had a public offering of 200 million euro bonds carrying a coupon rate of 1.50% due 2023 along with another issue of 500 million euros with a coupon rate of 1.875% due 2026.  The firm plans to utilize a portion of the proceeds to redeem   previously issued dollar bonds that carry high coupon rates. Eastman Chemical announced approximately $857 million in combined aggregate principal amount of Notes, with maturities ranging from 2021 to 2027, were validly tendered.  This bond swap reduced weighted average cost of fixed-rate debt from 4% to 3.65%.  Eastman Chemical should be able to reduce interest expense in 2017 by nearly $20 million.   A more specialty product portfolio generates should also result in a stronger, consistent cash flow. Management has projected $900 million in free cash flow for the full fiscal year versus $332 million in 2010.

Eastman expects adjusted 2016 earnings to be between $6.70 and $6.80 a share. Based on a price of $77.50, the firm trades at 11.5 earnings. Based upon a new annual dividend of $2.04 a share, its yield is a lofty 2.63%. The firm has a stellar 13.2% six-year dividend increase rate. Based on the firm’s high yield, low P/E ratio, and solid growth prospects, Eastman Chemical is a solid selection within the industrial sector.  At its current price, it is a member of our  Top 100 Dividend Stocks

Eastman Chemical Co. Dividend Yield Chart (Click to enlarge)

emn3

 

Chart Explanation:  Dividend growth stocks may be viewed favorably when the current yield is above historical readings for the past 5 years.

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