KRO - Kronos Worldwide: Dividend Should Be Suspended

2024-01-03 02:16:03 ET

Summary

• Kronos Worldwide's stock has experienced significant volatility, with a recent rally bringing shares close to breaking the $10 level.
• The company's lack of profitability and negative earnings raise concerns about the sustainability of its 7.6% dividend yield.
• Kronos' dividend growth rates have been poor, trailing inflation rates and requiring the dividend to stay intact to stay ahead of inflation.

Intro

We wrote about Kronos Worldwide, Inc. ( KRO ) back in July 2021 when we predicted rising prices for the US-based chemical company. Although shares didn't bottom out until September of that year, the stock from that point went on a sustained multi-month rally from just over $12 a share to finally topping out well above $19 a share in May of 2022. Since then, it was carnage with shares only finally managing to catch a bid in late October of 2023 at approximately $6.50 a share. Over the past 10 weeks, shares of Kronos have rallied solidly with the $10 level looking like it will be taken out to the upside any day now.

If we pull up a long-term chart of KRO, we see that shares bounced off long-term support back In October of last year where further gains could be on the cards if indeed the stock's long-term histogram can turn up into positive territory. Suffice it to say, the stock's current technical trend (where long-term overhead resistance could once more be eventually tested in this latest upturn) plus the stock's very generous 7.65% dividend yield could be viewed as attractive calling cards in Kronos. However, after delving into Kronos' key dividend metrics, it remains unknown how a suspension or a cut in the payout would affect the trajectory of the share price from that point. Therefore, (acting on the side of caution taking into account the stock's elevated short-interest of 8%+), we rate Kronos a 'Hold' at present predominately for the following reasons.

Absent Dividend Pay-Out Ratio

A big reason why Kronos' market cap has been shattered over the past 20 months is down to the contraction of the company's earnings. Net income over the past four quarters comes in at -$63.7 million whereas dividend payments have amounted to $87.6 million. Furthermore, we see on the balance sheet that Kronos' cash balance has subsided from $338+ million four quarters ago to $155 million in the company's most recent quarter. Suffice it to say, that although balance sheet cash can act as a temporary buffer to support the payout to shareholders, a dividend cannot survive in its present format if earnings were to remain in negative territory.

Now, bulls may point to how earnings are expected to bounce back into positive territory over the next few years as we see below. However, even based on present earnings projections (where revisions actually have been falling), Kronos' annual dividend of $0.76 per share will only begin to be fully covered by earnings in fiscal 2025 (and this is assuming no growth in the payout until that point).

Yields On Comparable & Alternative Investments

Many income-orientated investors make the mistake of investing in high-yielding stocks due to how much one can earn today. Nevertheless, when dealing with almost an 8% dividend yield, it is prudent to compare Kronos' yield to its peers as well as alternative investments. Similar size companies in the commodity chemicals industry are Koppers Holdings Inc. ( KOP ), Mativ Holdings, Inc. ( MATV ) & Hawkins, Inc. ( HWKN ). As we see below, all of these companies pay a dividend to their shareholders but at a substantial discount to what Kronos is currently paying out.

Then on the alternative side, you have the 10-year US treasury bond yielding just under 4% at present. Suffice it to say, that when a company's dividend yield surpasses both comparable & alternative averages by quite some distance, this demonstrates a red flag irrespective of Kronos' projected earnings growth. Such an above-average yield (relative to the averages) demonstrates elevated risk in Kronos from the investor's standpoint.

Dividend Growth

Dividend growth is important because it not only protects purchasing power against inflation but also fosters confidence concerning future growth. As we see below, however, dividend growth rates in Kronos have been poor in recent years and continue to trail inflation rates by some distance. This means that to stay ahead of inflation in investment in KRO, the 7.6%+ dividend needs to stay intact PLUS only a slight capital gain-loss in the stock can be reported over an annual basis. It is very easy to overlook the adverse effects of inflation on future cash flows (when you are receiving a 7.6%+ yield) but this is a BIG mistake when growth rates remain subdued for prolonged periods.

Conclusion

To sum up, despite Kronos' strong rally over the past 10 weeks & 7.6% dividend yield on offer, the company's lack of profitability brings risk to the table concerning whether the yield is sustainable. Earnings are expected to rebound next year, but recent revisions have been weak. If EPS revisions continue to deteriorate, we see a dividend suspension or cut taking place in due course. We look forward to continued coverage.

For further details see: