2024-01-17 23:58:02 ET
Summary
- Cabot Corporation has underperformed the S&P 500 over the past 8.5 months, indicating potential volatility and a possible down-cycle.
- The company's forward dividend yield is lower than its 5-year average, suggesting overbought conditions.
- Cabot's dividend growth rate of 4% may not be sufficient compared to other investment options, such as a 10-year US Treasury bond.
- However, momentum should never be overlooked, with near-term upside expected here due to robust bottom-line growth trends.
Intro
We wrote about Cabot Corporation ( CBT ) in April of last year when we stated that lower volumes & overbought technicals would most likely lead to volatility over the near term. Although shares did drop some 10%+ over the following two months, shares initially bottomed in late June'2023 before rallying once more post the company's encouraging Q4 report announced last November.
However, the consolidation shares underwent for well over 6 months in the mid-point of calendar 2023 means shares have returned just under 9% (when dividend distributions are included) over the past 8.5 months. This means Cabot has trailed the performance of the S&P 500 (17%+) over the same timeframe by some distance.
From a technical standpoint, the long-term MACD earmarked sell signal early last year did not result in lower prices for the specialty chemicals company. Given the divergences in both the RSI momentum indicator as well as the MACD, we still cannot dismiss the possibility of a multi-month down-cycle in CBT especially if the stock's 10-month average of $71.75 was breached to the downside once more. Suffice it to say, given how history repeats itself many times in financial markets and the fact that overbought MACD sell signals are more noteworthy than overbought 'Buy' signals, we reiterate that long investors should remain cautious at this juncture in case a down-move is ahead of us.
Therefore, given the indecisive nature of the company's technicals, we can go to Cabot's key dividend metrics to gain insights regarding future share-price direction. Cabot has paid out a dividend to its shareholders since going public and no dividend reductions have taken place since 1994.
Dividend Yield
Based on Cabot's forward dividend of $1.60 per share, the company's forward dividend yield works out to be 2.1% as we stand. This yield is lower than Cabot's 5-year average counterpart which comes in at 5.76%. Many dividend-orientated investors use the yield as a barometer of whether shares of the company are cheap or not. Cabot's present under-average yield ties in with what we are noting in the stock's long-term technicals (overbought conditions).
Dividend Growth
Dividend growth is crucial in that it protects the purchasing power of the investor over time. Furthermore, it enables shareholders to earn a percentage of the stock's growing earnings. As we see below, although the company's near-term 12-month dividend annual growth rate of 4%+ trails its corresponding 10-year CAGR counterpart (6.97%), it remains ahead of the 3 & 5-year average annual growth rates. While dividend growth has remained in Cabot, investors have to ask themselves whether a 4% average annual dividend growth rate (on a 2.1% starting dividend yield) is sufficient in today's market. We state this because a fixed investment such as the 10-year US Treasury bond guarantees investors almost a 4% yield (almost twice Cabot's yield). This means (based on present numbers), that the bond investor will have their full investment capital returned after 25 years whereas the Cabot investor (based on a 2% yield growing at 4% per annum) would need to wait 28 years for their full investment to be returned to him (assuming no share-price appreciation).
Pay-Out Ratio
Therefore it should become evident that robust share-price appreciation is required to ensure a long investment in Cabot is worth the risk. This brings us to the pay-out ratio, which is the single most important tool regarding the sustainability of the dividend. Dividend per share of $1.54 in Cabot's most recent fiscal year based on GAAP earnings of $7.73 resulted in a GAAP dividend payout ratio of 19.9%. On the surface, this seems too low as it raises the question of why shareholders are not receiving more of the company's earnings so we have to dig deeper to see why this is the case.
Free Cash Flow
Based on Cabot's trailing 12-month numbers (fiscal 2023), free cash flow per share of $6.26 per share is the highest amount of cash flow the company has generated in many years as we see below. Furthermore, given that the dividend currently accounts for only $1.54 per share of this kitty, this gives the company plenty of scope to keep investing aggressively in the business.
Free Cash/Flow Per Share | $6.26 | ($1.96) | $1.09 | $3.13 | $2.37 |
Year | 2023 | 2022 | 2021 | 2020 | 2019 |
Interest-Bearing Debt
Although Cabot's debt-to-equity ratio has declined from 116%+ to 97.7% over the past five years, the company continues to pay a growing amount of interest expense to service its debt. Interest expense amounted to $90 million in fiscal 2023 which resulted in an interest coverage ratio of 5.88 (5-year average of 7.06). Given Cabot's growing liquidity, however, interest & investment income grew to $31 million which compensated to a large degree for that $90 million expense. Suffice it to say, as long as investment income can remain elevated, this will offset the ramifications of the $1+ billion long-term debt load over time.
Forward-Looking Earnings Expectations
Given that earnings drive free cash flow (which is the most important metric in investing) & dividend growth, it is always a useful exercise to see what analysts are forecasting concerning future earnings growth rates. As we see below, a 20%+ bottom-line growth rate is expected for fiscal 2024 along with double-digit forecasts for the following two years. These projections should mean Cabot can continue to grow the dividend and also invest aggressively to ensure aggressive growth.
Conclusion
To sum up, despite Cabot's lofty technicals, there are no glaring red-flag trends in the company's key dividend metrics. Net income more than doubled in fiscal 2023 with aggressive growth expected in 2024. Free cash flow easily covers the dividend which means the stock's high retention ratio means strong reinvestment of capital over time. We see further upside here for the time being. We look forward to continued coverage.
For further details see:
Cabot Corp.: Dividend Trends By The Numbers