Dividend Growth Stock Overview: Stepan Company

Stepan Company manufactures chemicals used in laundry detergent.
Photo courtesy Jeepers Media/flickr.com.

About Stepan Company

Stepan Company produces specialty and intermediate chemicals that are used in a variety of end products. Stepan Company products are used in the manufacture of toothpaste, soap and detergent, and in the production of shale oil and oil sands. The company is headquartered in Illinois and employs over 2,000 people worldwide.

Stepan Company has three reportable business segments: Surfactants, Polymers, and Specialty Products.

The term surfactant is a contraction of “surface active agent”. Surfactants are chemicals that affect how two liquids or a liquid and a solid interact; for example, they enable water to remove soil from another surface. The Surfactants segment produces these chemicals, which are a basic cleaning agent in detergent, shampoo, soap, toothpaste, and cosmetics. Stepan also sells surfactants to end users in the enhanced oil recovery markets. This business segment produced 67% of total company sales in 2014 and 46% of total company operating income. The bulk (61%) of the segments sales were in the North American market, with another 22% in the European market.

Polymers are large chemicals composed of repeating smaller molecules. They are used to manufacture rigid foam for thermal insulation in the construction industry, and as a raw material base for coatings, adhesives and sealants. They are also used in the manufacture of appliances. The Polymer segment provided 29% of total company sales and 46% of total company operating income.

Finally, the Specialty Products segment produces chemicals used in food products and pharmaceutical applications. This segment provided the remaining 4% of total company sales and 8% of operating income.

The Specialty Products segment includes the operations of the Maywood, New Jersey manufacturing plant, which was acquired by Stepan when it purchased the Maywood Company in 1959. This facility has the distinction of being the only legal importer of coca leaves in the United States. This facility extracts cocaine from the coca leaves and sells the cocaine-free extract to The Coca-Cola Company for use in their eponymous product. The extracted cocaine is sold to Mallinckrodt Inc., a St. Louis-based pharmaceutical manufacturer, which purifies it into cocaine hydrochloride. Mallinckrodt is the only company in the United States licensed to purify cocaine for medicinal purposes. Eye and ear, nose and throat specialists use the cocaine hydrochloride as a local topical anesthetic.

Several factors contributed to the drop in net income in 2014. The cost of raw materials – which are mainly petroleum and plant-based – increased, primarily for the Surfactants segment, and the bankruptcy of a major Polymer customer increased selling expenses. The effects of a strong dollar also reduced pre-tax income by 1.2%. A bright note is that the company was able to increase prices, which offset the decline in the sales numbers.

In the 1st quarter of 2015, Stepan reported that adjusted net income was up 59% to 90 cents per share. The bulk of this came from an 84% increase in the Surfactants segment operating income. Net sales were down 4%, mainly due to currency effects from a strengthening dollar. In a recent investor presentation, the company expects to see future growth for the Surfactants segment from expansion in the energy sector and for the Polymers segment from tighter energy efficiency requirements in China.

The company has an active share buyback program. Back in February 2013, the Stepan board authorized the repurchase of 1 million shares of stock. As of the end of 2014, nearly 804,000 shares remained on the authorization. This represents 3.6% of the 22.3 million outstanding shares.

The company is a member of the S&P Small Cap 600 and Russell 2000 indices and trades under the ticker symbol SCL.

Stepan Company’s Dividend and Stock Split History

Stepan Company Dividend Growth

Stepan Company has compounded dividends at nearly 9% since 2009 and nearly 6% since 2004.

Stepan Company has increased dividends since 1968. The company announces annual dividend increases in mid-October; the stock goes ex-dividend at the end of November. In October 2014, Stepan announced a 5.9% increase in the dividend to an annualized rate of 72 cents per share. I expect Stepan to announce its 48th annual dividend increase in October 2015.

Stepan has a history of modest dividend increases, usually in the high single digit percentages. From 2009 – 2014, the company compounded the dividend at 8.92% a year. The growth rate over longer periods is lower; for the 10 years ending in 2014, the growth rate is 5.97%. For the 20 and 25 years ending in 2014, the growth rate is 5.85% and 6.44%, respectively.

Stepan Company has split its stock 5 times, each time 2-for-1. The most recent stock split was in November 2012. Prior to that, Stepan split its stock in December 1994, December 1988, December 1981, and September 1972. Had you owned a single share of Stepan Company stock through all 5 stock splits, you’d now have 32 shares.

Over the 5 years ending on December 31, 2014, Stepan Company stock appreciated at an annualized rate of 5.87%, from a split-adjusted $29.89 to $39.76. This dramatically underperformed the 13.0% compounded return of the S&P 500 index, the 15.9% annualized return of the S&P Small Cap 600 index and the 14.0% compounded return of the Russell 2000 Small Cap index over the same period.

Stepan Company’s Direct Purchase and Dividend Reinvestment Plans

Stepan Company does not have a direct purchase or dividend reinvestment plan. In order to invest in the company’s stock, you’ll need to purchase it through a broker; most will allow you to reinvest dividends without any fee. Ask your broker for more information on how to set this up if you are interested.

Helpful Links

Stepan Company’s Investor Relations Website

Current quote and financial summary for Stepan Company (finviz.com)

 

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