Income investors are always on the lookout for high yield dividend stocks, preferably the kind supported by stable businesses with ample cash flow and a long history of distributing some portion of it to shareholders. Above average growth opportunities aren't required, but are certainly nice to have.
Enter Compass Minerals International (NYSE: CMP). You may have never heard of the company, but its business is simple to understand. It's the largest miner and supplier of road salt and de-icing products -- a stable, non-cyclical, and recession-proof industry-- in North America. It owns a smaller but faster growing portfolio of products in agricultural nutrients, and recently expanded into the all-important Brazilian market.
Oh, and it pays a 4.3% dividend yield. That alone means it's at least worth a closer look.
By the numbers
Compass Minerals International had a rough month last September. One of its primary salt mines suffered from a partial ceiling collapse, which damaged part of the conveyance system. The good news is no workers were injured. The bad news is it took several weeks to repair the damage, which reduced the mine's output and increased costs.
Management wisely delivered that bit of bad news with a cautious update on its South American operations: sales volumes were going to be lower than expected. That pushed the company to lower its full-year 2017 guidance with just three months to go in the calendar year.
The timing of those events wasn't great, as Compass Minerals International was already facing challenging market conditions for its salt operations thanks to warmer than usual winters in recent memory. After a rough first nine months of the year, the business ended 2017 with some momentum, although a one-time non-cash adjustment from the new tax law sapped net income. Here's how the business fared in 2017 compared to 2016:
Operating cash flow
As you can see, the business delivered mixed results. The salt segment generated slightly less revenue and much less operating income in 2017 compared to the year-ago period. The plant nutrition segment in North America delivered stronger revenue and earnings. Meanwhile, the plant nutrition segment in South America didn't exist in 2016, so the entire $375 million in sales and $49.1 million in operating income -- over half of which came in the fourth quarter -- generated last year counted as gains.
The earnings power of the business took a hit in 2017, which isn't ideal, but if cash flow remains strong, then perhaps income investors don't have much reason to worry. Is there any indication that last year's woes were simply short-term hiccups for Compass Minerals International?
The road ahead
In late January the company provided an update to shareholders about fourth-quarter 2017 activity for its salt business. Sales volumes were essentially unchanged from the prior-year period, although an uptick in snow events in early 2018 could provide a shot in the arm during the first quarter. Overall, this winter has been closer to the 10-year average in the company's core markets, whereas the last two winters were unusually warm and precipitation-free.
Indeed, the company's full-year 2018 guidance provides reason for optimism. Compass Minerals International expects salt sale volumes to exceed its 10-year average this year, although higher cost inventory will pressure margins in the first half of 2018. Both of its plant nutrition segments are expected to improve compared to 2017, albeit with potentially sluggish first halves. The initial diluted EPS outlook is for between $2.75 and $3.25, which is identical to 2017 EPS at the low end and just shy of 2016 EPS at the high end.
While Compass Minerals International can't control the weather, it can make investments to help control its internal expenses. A $225 million capital expenditure program that began in 2014 is wrapping up this year. The expected result: infrastructure improvements to allow decades of safe operation, a 25% reduction in operating costs, and increased flexibility to respond to fluctuations in market demand. Management estimates $40 million in annual cost savings will be achieved in 2018.
Meanwhile, the company sees its South American plant nutrition business as an integral vector for long-term growth. Compass Minerals International provides one of the most diverse nutrient offerings in the industry, and it thinks the portfolio is capable of consistently delivering operating margins of 17% to 20% by 2020.
That didn't quite pan out in 2017. The segment achieved an operating margin of just 13.1% due to the continuation of multi-year weakness in Brazilian agriculture. While that's also out of the company's control, it does remain a real risk for shareholders -- just not an existential one.
In addition to volatility in the agricultural market, investors should also know that the foray into South America required a significant increase in debt. The company's debt-to-assets ratio rose every year from 2013 to 2017, and from 44.5% in 2015 to 51.7% at the end of 2017. That has yet to imperil the business, thanks to a healthy and mature cash flow, but it's definitely something to keep an eye on.
Compass Minerals International has delivered relatively strong results despite a host of negative external factors including unusually warm back-to-back winters in North America, the partial collapse of a ceiling at a core salt mine, and a global agriculture downcycle. Those figure to be temporary, albeit somewhat painful, operating conditions.
But the completion of infrastructure investments, the return of more "normal" wet weather this winter, and hopes for an agricultural rebound could all combine to help Compass Minerals International deliver on its 2020 goals for greatly improved operating margins.
Of course, this isn't a risk-free investment. The expansion into South American agriculture was accompanied by a sharp increase in debt, and there's no guarantee that global agriculture will rebound anytime soon. Nonetheless, the risks are not existential and don't appear close to threatening cash flow or dividend payments. Long story short, I think income investors should feel pretty comfortable pulling the trigger here.
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