Topic: Growth Stocks

Merger should secure this dividend for another 46 years

This lubricant and chemical manufacturer saw its earnings jump 61.6% in the most recent quarter.

The company has completed 12 acquisitions since 2010 and is waiting on U.S. government to approve its merger with a specialty chemicals, oils, and lubricants maker for the automotive, aerospace, mining, and beverage industries.

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QUAKER CHEMICAL CORP. (New York symbol KWR; started up in 1918 and currently operates 35 plants in 21 countries. Those facilities make lubricants and chemicals that keep mechanical parts from rusting. Quaker’s products help its clients cut their costs and improve efficiency. In addition to headquarters in Pennsylvania, it has regional offices in the Netherlands, Brazil and China.

The company has completed 12 acquisitions since 2010. Each was a smaller firm with attractive technologies and clientele. That helped cut the risk of the acquisitions.

Quaker most recently agreed to acquire rival Houghton International Inc. in 2017. Based in Philadelphia, the privately owned firm makes specialty chemicals, oils, and lubricants for customers in the automotive, aerospace, mining and beverage industries.

Under the terms of the takeover, Houghton’s owners will receive $172.5 million in cash and a 24.5% stake in the combined company.

The recent shutdown of the U.S. government delayed regulatory approval of the merger. As a result, Quaker now expects to complete the takeover in mid-2019. It’s likely that regulators will force the company to sell some product lines before approving the deal. In all, they represent just 3% of the combined company’s annual sales of roughly $1.5 billion.

Quaker expects the merger with Houghton will let it cut $45 million from its annual costs by the end of the third year. As of June 30, 2018, it held $90.2 million in cash, and its long-term debt was $58.3 million, or a low 2% of its market cap.

Growth Stocks: High market share justifies a higher P/E multiple

In the quarter ended June 30, 2018, the company earned $19.2 million, or $1.44 a share. That’s a gain of 61.6% over its year-earlier earnings of $11.9 million, or $0.89. If you disregard unusual items, earnings per share in the latest quarter rose 25.8%, to $1.56 from $1.24. Sales also gained 10.3%, to $222.0 million from $201.2 million. Those gains are due to stronger demand and selling prices, as well as a lower tax rate.

The stock trades at 26.1 times the $5.78 a share Quaker will likely earn in 2018. That’s a high multiple, but still acceptable, in light of the company’s high market share in this niche industry segment.

The company last raised its dividend with the July 2018 payment. The annualized dividend of $1.48 yields 0.8%. The company has paid dividends for the past 46 years, and has increased the rate each year for the past 42 years.

Recommendation in Wall Street Stock Forecaster: Quaker Chemical Corp is a buy.


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