Looking at the balance sheet, CMP’s debt load seems reasonable. The company could repay all of its debt with cash on hand and two years of earnings before interest and taxes (EBIT). CMP’s reliable free cash flow and Ba1 credit rating from Moody’s are also good signs.
Source: Simply Safe Dividends
CMP’s reasonable payout ratio (49%), strong profitability, consistent cash flow generation, recession-resistant business segments, and reasonable balance sheet support its dividend Safety Score.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
CMP’s dividend Growth Score is 55, suggesting that the company’s dividend growth potential is about average.
CMP has increased its dividend every year since going public in 2003 (12 year growth streak), compounding its dividend at a rate of 10% per year. The company most recently raised its dividend by 10% in 2014.
Source: Simply Safe Dividends
The company will be incurring substantial capital expenditures through 2016 to fund expansion projects, which should generate significant free cash flow in 2018 and beyond. As this plays out, CMP’s 10%+ dividend growth rate could prove to be sustainable.
Until then, CMP will continue dealing with (temporary) headwinds related to its salt and specialty fertilizer businesses, which could cause its next dividend hike to come in under 10%.
While CMP is far too small and would still require 13 more years of dividend increase to join the S&P Dividend Aristocrats Index, it has many of the characteristics we like to see in consistent dividend growth stocks.
Valuation
CMP trades at about 14x forward earnings and offers a dividend yield of 3.6%, which is meaningfully higher than its five year average dividend yield of 2.7% and a great starting base for investors living off dividends in retirement.
While there is some uncertainty (e.g. agriculture markets, warm winter weather) around the company’s $500 million EBITDA target in 2018, if CMP is successful, it trades at 6x projected EBTIDA in 2018. For a company with several hard-to-replicate competitive advantages, this appears to be an attractive price.
As long as agriculture markets don’t fall off a cliff, SOP supply remains reasonable, and winter weather normalizes over the coming years, we believe CMP can grow its earnings by at least 5-10% per year going forward. When coupled with its current 3.6% dividend yield, the stock appears to offer total return potential of at least 9-12% per year.
Conclusion
Compass Minerals International, Inc. (NYSE:CMP) is a stodgy business with a long operating history. While it will never be a fast-growing company, its valuable asset base, logistical network, and recession-resistant products result in a solid cash flow stream and remind us of some of our favorite blue chip dividend stocks.
We generally prefer to avoid small cap stocks for retirement income (especially those that are less diversified like CMP) because they are generally more volatile and less proven businesses, but we believe CMP is an exception. The stock appears to offer reasonable total return potential, safe income, and decent income growth for conservative dividend growth investors.
Disclosure: None
