KRO - Kronos Worldwide: Double-Digit Dividend Yield Is Hard To Turn Down

2023-10-17 00:28:18 ET

Summary

• Kronos Worldwide has seen a 25% drop in share price due to reduced demand and disappointing revenue estimates.
• KRO operates in the materials sector, primarily producing titanium dioxide for the paint industry.
• The company's profitability is tied to the pricing environment, and while it faces challenges, its dividend yield remains attractive.

Investment Rundown

Since my last article on Kronos Worldwide Inc ( KRO ), the share price has dropped by over 25% as the market seems to be losing faith in the company after they missed revenue estimates in their last report. I am revisiting the company again to give an update to my views and seeing as it has reached a double digit dividend yield right now, I saw it fit to publish this. Reduced demand seems to be present in Q2 just like it was in the first quarter as well of 2023. I think that this is a trend and a factor that unfortunately will be sticking with the company for the remaining part of 2023. From an investor's standpoint, however, I think that right now is still not the time to be adding to a position as we may see lower prices still. Investors should be aware that commodity-driven companies like KRO will have volatile share prices and allocating a large portion of a portfolio to such a company comes with additional volatility. I wouldn't hold a position of more than 0.5 - 1% in KRO, which would still give me ample exposure to the double-digit dividend yield the company has managed to gather up right now. My stance on KRO remains the same, it's a hold until we see a reversal in the demand for their products.

Company Segments

KRO operates within the materials sector, with a historical focus on titanium dioxide—a niche market that is experiencing rapid growth. With a global presence, KRO serves diverse markets. The titanium dioxide it produces comes in two forms: crystalline rutile and crystalline anatase. These products find applications primarily in the paint industry, where they enhance brightness and opacity. Additionally, they are used in ink, cosmetics, and as a feedstock by sulfate-process TiO2 plants.

KRO's profitability is closely tied to the pricing environment for its products. In challenging times with low prices, the company faces difficulties in maintaining robust profit margins, resulting in inconsistent financial performance over the years. However, what may attract many investors to KRO is its dividend yield. While the current payout ratio of 280% raises questions about the sustainability of such a high dividend in the long term, the upward trend in prices across various markets is providing a favorable outlook for KRO's business. This positive pricing environment bodes well for the company's prospects. What we have seen recently is a combination of higher raw materials costs for the company and a softening in demand which has resulted in the quite frankly lackluster earnings report that was Q2. It seems to have been a significant factor behind the decline the company saw in its share price over the last few months. Going forward, a key priority for the markets I think will be to see margin expansion for KRO which would prove that they can maintain earnings throughout tough market conditions. Right now they can't, and that has led to the valuation being cut.

Earnings Highlights

The last report from the company revealed some cracks in my opinion. It was already somewhat visible in the first quarter, but I think the impacts were more noticeable this time around. The cost of raw materials and higher energy costs have taken a toll on the bottom line for the company. The cost of sales landed at $399 million in the last quarter, down from $444 million a year prior. The sales declined by nearly 30% YoY whilst the cost of sales only declined by 11%. With sticky expenses and costs, it resulted in KRO posting a negative net income.

Impacting the company further has been declining volumes. This has led to lower sales of course, but it has had less impact on the cost of sales. The TiO2 sales volumes declined by 26% on a YoY basis and the product pricing by 2%. When we look at the last 6 months though the product pricing increased by 1% which is a decent result. Going into the third and fourth quarter investors will want to see this grow further. It should ultimately help offset some of the lower volumes KRO is experiencing and lead to them being able to maintain buying back shares and distributing their dividend as the bottom lie hopefully becomes profitable once again.

The market seems to be anticipating that KRO will continue to deliver decent revenue growth but is anticipating also that the earnings may be down quite badly in the coming quarters. The 2023 estimates are for the EPS to be negative $0.35 which I certainly think is plausible given the last quarter. Based on a p/s metric though KRO seems to offer quite little downside right now as it's already trading quite far below the rest of the sector at 0.49 on an FWD basis. This goes in line with my hold as I think the downside may be limited, but it will only really increase when there is a clear reversal in demand for their products. I wouldn't set out a target price until the earnings are consistently positive, which I think could be in 2024 and beyond. The market seems to estimate though that by 2025 the EPS will be $0.93, leaving KRO trading at an FWD p/e of 7.4. That leaves some decent upside should the market value the company more like the sector, meaning a p/e of 13 - 14 instead.

Risks

KRO is currently grappling with a significant and recurring challenge, which is the volatility and unfavorable pricing dynamics in the titanium dioxide market. Given that titanium dioxide is the cornerstone of the company's operations, KRO is somewhat limited in its ability to effectively hedge against or mitigate the impact of market downturns. This reliance on the titanium dioxide market makes the company particularly susceptible to price fluctuations, posing a notable risk to its financial performance and overall stability.

In addition to the challenges posed by volatile titanium dioxide prices, KRO faces the potential impact of unfavorable and fluctuating currency exchange rates. Given its global market presence, the company is inherently exposed to fluctuations in various currencies. Consequently, these currency-related factors can contribute to inconsistent financial results, with some quarters experiencing adverse effects on the bottom line, while others may see more favorable outcomes. This currency risk further underscores the need for KRO to carefully navigate the complex dynamics of international markets.

Final Words

The share price for KRO has declined quite a fair bit since my last coverage of the company. It now has a double-digit dividend yield but also an 11% short interest which could weigh on the share price in the short term. However, I do think that the company still has some value as the dividend should be able to be maintained as KRO can tap into cash reserves and profitability should be seen in 2024 and beyond I think. I am looking for a reversal in the volumes for the company, and until that happens it will continue to be a hold from me. I covered the stock before and like I said earlier on in the article, KRO remains a solid dividend payer and that is why I want to reiterate the hold stance for them.

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