2 Dividend Plays With Chemistry

06/09/2011 9:00 am EST

Focus: STOCKS

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

The trend toward dividend stocks makes the petrochemicals sector one of the biggest beneficiaries, writes Taesik Yoon of Forbes Growth Investor.

I think dividend paying stocks will continue to outperform for the remainder of the year.

As for the month ahead, I don’t expect too much excitement. Barring any major surprise in economic data or macro/geopolitical events, and in the absence of earnings announcements, I think the equity markets will prove less volatile in June, though the trend may remain negative.

I would view material weakness in quality stocks—especially those with attractive valuations and strong financials—as an opportunity to add to your positions.

Huntsman Corporation (HUN) is a global producer of chemicals used in numerous consumer and industrial products and applications. The company’s Polyurethanes, Performance Products, Advanced Materials, and Textile Effects operating segments manufacture and supply organic chemicals, while its Pigments segment produces inorganic chemicals.

HUN’s products are used in aerospace, automotive, construction products, consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, chemicals, and dye.

Improved demand from these markets amid the ongoing global economic recovery has helped fuel strong volume growth in recent periods. First-quarter volume rose 23%. This helped total revenue jump 27.9% year-over-year, to $2.68 billion.

The Polyurethanes segment was the biggest contributor, with sales up 36.5%, to $1.05 billion. Higher selling prices helped offset rising input costs, and contributed to a sharp increase in profit margins.

We suspect that the market’s penchant for falling in May could have exacerbated selling activity by investors wanting to book their profits on a stock that had more than doubled since last September.

Therefore, we believe the recent sell-off has created a good buying opportunity, with the stock trading at just 9.6 times its 2011 consensus estimate of $1.80 per share.

As a bonus, HUN also pays quarterly dividends of ten cents per share. This works out to a fairly decent annual yield of 2.3% based on the current stock price.

Meeting China’s Exploding Demand
Based out of Vancouver, Canada, Methanex Corporation (MEOH) is the world’s largest supplier of methanol.

Methanol is a liquid commodity derived from natural gas and coal that is used in the production of numerous chemical derivatives, including formaldehyde and acetic acid. These derivatives are used to make plywood, particleboards, foams, resins, and plastics.

Methanol is also a key commodity used by the energy markets. It is used to produce methyl tertiary butyl ether (MTBE), a component in gasoline, and biodiesel. In certain markets such as China, it is also directly blended into gasoline and diesel fuel.

As a region, China has been especially strong, with methanol demand rising 15.4% in 2010 from the prior year, to 4.5 million tons. This demand was driven by rising automobile ownership, stemming from the country’s fast-growing economy, which has increased gasoline consumption. It also has benefited from better competitive pricing relative to gasoline components derived from crude oil.

Despite these strong results, the stock has fallen a little more than 10% since the first-quarter earnings report. Investors may be concerned by the level of methanol purchased, which carries higher costs than methanol produced by the company.

We view the recent sell-off as a good buying opportunity.

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