Where do you keep your TiO2 Dividends, KRO

I was looking at how to increase the yield of our stock portfolio.  Some of our recent picks were on the low side, so we wanted to buy something on the higher side.  What we came upon a nice way to get TiO2 Dividends with a 9.2% dividend yield.  Or so we think?

TiO2

Picking a Company

So we went into a stock screener and looked at US-based companies with 5% or more dividend yield and sorted by largest to smallest yield, with some other criteria.  We went through the list and started researching them one by one.  We still want a best of breed company in their category.  It was easy to knock off a lot of companies because of our rules and other things we did not like.  We were surprised to find a company yielding 9.2% that we liked at the time.  We found Kronos Worldwide (KRO).

Background

Kronos Worldwide (KRO) produces and sell TiO2, or titanium dioxide, throughout the world.  They make TiO2 in 2 crystalline types, anatase and rutile.  They produce commodity and specialty products, such as cosmetic. In addition, they also produce titanium oxychloride, which is used in the manufacturing for electroceramic capacitors for electronics that go into cell phones. They have been producing TiO2 since 1916, which means they have producing it a century.  The company is headquartered in Dallas, Texas. However, they are a subsidiary of Valhi, with Valhi owning 50% of the shares.  Contran holds 93% of Valhi’s stock.


Valuation

Currently, the company has a poor valuation.  They are losing money, so they have no PE ratio.  Their PS (Price to Sales) ratio is only a 0.5, which is cheap.  The low commodity prices, specifically TiO2 for Kronos Worldwide (KRO), is making it hard to earn a profit.  In addition, the overseas sales with a strong US dollar is reducing their revenue from overseas sales.  If the US dollar is up 20% in their markets, their overseas sales will decrease 20%, even if their sales is flat in the foreign currencies.  If commodity and currency change course, this will have a magnified effect to the positive for Kronos Worldwide (KRO).

Future

TiO2 is considered a quality of life product by Kronos Worldwide (KRO).  TiO2 market has been increasing at 3% a year since 1990.  That is a good steady growth rate.  Most of the market is in the US and Europe, so if other parts of the globe increase usage, the market for TiO2 could increase greatly.

Kronos Worldwide (KRO) has 50% of their revenue from Europe, and they believe they are the largest producer in Europe.  Kronos Worldwide (KRO) believe they have 15% of North American production and have 9% of worldwide demand.  With such a large market share, we believe this will help them survive this market weakness.

However, we need TiO2 prices to go up to help this company.  There is 2 ways to achieve this.  With TiO2 demand increasing at about 3% a year, this will help the demand side.  On the supply side, some capacity projects have been canceled and some plants will be closing.  This is good news for the company, as it should eventually lead to higher prices.

TiO2 Dividends

Dividends has stayed the same at $0.60 a year since June 2011.  While we would like to see dividend increases, starting at a 9.2% yield does not need the increase rate when a company only yields 2%. Currently, they are paying out a dividend equal to 5% of their revenue.  This is an ok number. What we want from this company is for the dividend to stay the same for years, with an eventual increase after TiO2 prices increase.  This could provide our portfolio with a nice cash flow.

What I bought

This is a high risk company.  If prices turn around, we will have a great best of breed company in TiO2.  If they do not, we will have a poor investment.  We bought 45 shares of Kronos Worldwide (KRO) for $299.20, including those pesky commissions.  We will start earning $27 a year in dividends. If we are right that this is a good investment, we will be rolling in the dividends.  If we are wrong, we could be looking at dividend cut in the near future.

Buyer’s Remorse?

Often, I research a lot of stocks to see what my next pick will be and then I buy it.  Rereading some of the research to finish writing this post, I am having seconds thoughts. This company is highly levered to TiO2, which makes sense, because that is what they sell.  However, their profit margin is negative and their dividend looks like it is being paid with debt. While their owners probably need/want the dividend for their books, it looks likely to be cut if TiO2 prices do not recover soon. This might be an option stock.  If TiO2 does well, Kronos Worldwide (KRO) could shoot back up to $30 per share and be paying a 20% YOC in 5 years.  Or, our dividend payments could be completely cut and have a dead stock for years to come.  While I am learning about investing, I am glad I make many small purchases. I am going to keep my purchase for now, but I do not think I will be buying anymore of this stock for a while.

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Disclosure: KRO – We own shares.

 

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