FF - FutureFuel: Another Special Dividend May Be Around The Corner

Summary

• FutureFuel generated strong cash flow in Q3.
• Cash & short-term investments now well over $200 million.
• Trading & financial conditions are here once more to pay out another special dividend.

Intro

Ever since FutureFuel Corp. ( FF ) paid out a $2.50 per share special dividend in 2021 when the company lost a sizable percentage of its market cap, we have become very interested in this play. Why? Because when management commits on a large scale to its shareholders in the rough times, it speaks volumes as to what the company will do in the good times. Suffice it to say, the stated 2.68% forward yield (working off a quarterly payout of $0.06 per share) tells us nothing of the real story here. The reason being that management (besides the above-mentioned $2.50 per share payable in 2021) also rewarded shareholders with sizable distributions both in 2020 ($3.00 per share) and 2016 ($2.29 per share).

Therefore, when one takes into account that shares of FutureFuel currently hover around the $9 mark, it quickly becomes apparent that investors (who have been invested in this stock for any considerable length of time) most likely have recouped in full their initial investment by now.

Suffice it to say, in a company such as FutureFuel, capital gain in the share price is not desired because compounding takes place much faster when one can consistently buy shares at cheap prices. In fact, as we see below, shares have been trading on average between $6 & $11 per share over the past five years and we see another special dividend looking shortly due to very encouraging near-term results.

Q3 Earnings

Net income in FutureFuel 's most recent third quarter hit $15.78 million which was a 71% increase over the same period of 12 months prior. The significant increase in bottom-line profit was due to a very strong showing from the biofuels segment (margin-wise) and elevated volumes in the chemical segment. FutureFuel's income statement trends are predictable in that elevated margins invariably drop to the bottom line due to the lack of any interest-bearing debt. Furthermore, the consistent additions of investment income further boost that bottom-line profit.

Q3's almost $16 million in net profit ended up generating $44.127 million in operating cash flow for the quarter. This was a sizeable increase once more over Q3 in 2021 and came as a result of a sizable change in the company's working capital (Inventory, Accounts receivables, etc.). Since just over $10 million was used for investing & financing purposes, we saw well over $30 million get added to the balance sheet which is obviously really encouraging from a dividend standpoint.

Why? Because cash & short-term investments now total well over $200 million on the balance sheet which is ample liquidity if indeed the company was going to pay out a sizable special dividend once more. A $3 per share payment for example would cost approximately $131.7 million given the present number of shares outstanding comes in at 43.9 million. Definitely affordable.

Risks

In the company's third-quarter report, we saw how a lingering or deteriorating Covid-19 environment would potentially affect FutureFuel's business and associated cash flows. The first area which would be adversely affected in this environment would be demand on FutureFuel's customers' side, especially for chemicals. Although FutureFuel has seen a strong recovery in demand overall since the pandemic first hit back in early 2020, demand has still not come back to pre-pandemic levels.

Then you have the supply side. We have seen serious disruptions across a whole host of sectors over the past 18 months with respect to companies not being able to source the products they need in a timely manner. Again to a large degree, supply chain issues are out of FutureFuel's control which is another risk due to not being able to fulfill orders on time for customers. The final risk would be a Covid plant outbreak which again would adversely affect operations and productivity respectively.

However, given how margins have been increasing at the firm plus the very keen valuation , we continue to believe the potential reward outweighs the downside risks in FutureFuel. The company has no debt and is trading well under two times its cash position. Even in growth tapers off from here, we continue seeing FF generating cash flow for some time to come.

Conclusion

With cash & short-term investment increasing meaningfully once more in FutureFuel, there is every opportunity that another special dividend could be on the cards this year. Let's see what Q4 earnings bring. We look forward to continued coverage.

For further details see: