FTSE 100 chemicals business Croda International (LSE:CRDA) has been increasing its dividend annually for each of the last 32 years. And I think there’s more to come.
The company’s share price is lower than it was five years ago, but I think the long-term prospects for the business look good. To me, this looks like a stock to buy while it’s on sale.
What does Croda do?
Just under 90% of Croda’s revenue comes from two industries. The first is consumer care (52%) and the second is life sciences (36%).
In consumer care, the company makes the chemicals that give things like skincare products their specific properties. So this might be reducing the appearance of wrinkles, or improving skin tone.
In life sciences, Croda’s chemicals go into drug delivery systems. In short, this is what enables drugs – including Pfizer’s Covid-19 vaccine – to target specific parts of the body.
Importantly, the dividend aristocrat isn’t a manufacturer of generic chemicals – its products are highly specialised. In my view, this makes it a much more attractive business to consider investing in.
Why invest?
Generic chemicals companies sell their products at whatever the market rate is. The only kind of competitive advantage comes from keeping its own costs down, which is hard in an inflationary environment.
By contrast, Croda’s differentiated products give it the ability to set its own prices. And the high switching costs for customers enable the company to pass on the effects of inflation.
Its personal care chemicals are protected by patents, preventing duplication by competitors. And its drug delivery products are specified in approval documents making them virtually irreplaceable.
In short, Croda’s competitors can’t emulate its products and customers can’t replace them. That’s a powerful combination that puts the business in an extremely strong position.
Why now?
Croda’s share price is almost 30% lower than it was a year ago. The main reason is that demand has fallen away sharply in the life sciences division as the Covid-19 pandemic has subsided.
Management said recently that it couldn’t say when things would recover. With interest rates above 5%, the opportunity cost of waiting is a risk investors ought to take seriously.
I see the share price as an opportunity though. The business might be more cyclical than investors imagined when the stock hit an all-time-high in 2021, but I think it’s an extremely high-quality firm.
It might be difficult to say exactly when things will pick up for Croda, but I don’t think there’s much question that they will. With a long-term perspective, I’m looking to buy the stock now and wait.
Rising payouts
A 2.25% dividend yield might not seem like a lot. But Croda’s ability to increase its shareholder distributions, even in an extremely difficult environment, is outstanding.
This is why the company’s achieved Dividend Aristocrat status. And its growth hasn’t been trivial either – over the last decade, payments to shareholders have increased by an average of 5% a year.
If I’m right about Croda, the share price won’t be this low indefinitely. So I’m looking to buy the stock for my portfolio before the market starts to get more optimistic.
