More Than a Grain of Salt
09/30/2008 10:30 am EST
Josh Peters, editor of Morningstar DividendInvestor, and analyst Elizabeth Collins find a strong commodity stock that pays a fat dividend.
We believe Compass Minerals (NYSE: CMP) has a wide economic moat and the prospect of substantial, profitable growth because of low-cost advantages in its two primary operations.
Salt—historically Compass’s largest business—is a commodity product, [and] industry players compete on price. But Compass’s world-class rock salt plus access to water transportation systems give the company the ability to produce and deliver highway de-icing salt cost-effectively.
And in Compass’s smaller but rapidly expanding sulfates of potash (SOP) unit, an energy-efficient Great Salt Lake solar evaporation facility gives the firm an edge in the production of SOP. SOP prices are increasing dramatically, thanks to strong global demand for fertilizers and tight supply. We believe this trend has staying power. Increasing personal income levels in developing countries are driving people to change their diets.
Although Compass’s results will fluctuate from year to year on the basis of winter weather, we believe that over the long run, demand for highway de-icing salt will reflect normal winter weather patterns, on average. If winter weather turns out to be milder in the future than it has been in the past, Compass’s results could fall short of our expectations.
Though Compass appears to have a high debt/capital ratio, historic-cost accounting understates the value of its mining assets. Operating earnings should cover interest expense more than four times over in 2008, and a dividend payout ratio of 30% provides good protection for weather-related swings in revenue. Salt consumption grows slowly, so this segment’s growth depends on market share gains and pricing.
Meanwhile, a dramatic expansion of earning power is under way in Compass’s SOP segment (both in terms of production and price). On a normalized basis, we expect a high-single-digit rate of per-share earnings growth in the long run. Compass has raised its dividend each year since coming public; however, it remains to be seen whether management will raise the dividend at a rate in tandem with earnings.
Our annual dividend growth forecast remains 8%; with the stock yielding 2.1%, this indicates income-driven total returns in the 10% area. That said, we believe Compass is capable of growing its dividend much faster in the next few years—giving its total return potential additional upside.
The firm’s earning power continues to strengthen, and for those of you who don’t own the stock at all, I think it’s worth considering for modest positions at prices of $62.70 or less. (It closed around $47 Monday—Editor.)
It takes no special insight to recognize that Compass has become something of a tool for the momentum crowd. But momentum doesn’t determine value; for our purposes, only dividends do that. I’d still like to see what management gives us for a pay raise next year before calling Compass a table-pounding buy for income again.