Out of OLN
I've posted a lot about OLN in this space. If you were paying attention, 2 years ago you caught a run from 14 to 29, collecting a nice 5% dividend while the stock ran up. You got out at 27 along with me and got back in, if you had the wit, somewhere between 9 and 11.
OLN is a nice stock to analyze for a couple of reasons. First of all, the $0.80 dividend has not changed in decades. Second of all, they are a monoline cyclical commodity stock, chlor-alkali, levered to energy and an input for textiles and housing, and the stock more or less behaves that way. (They have an ammunition division that generally contributes 11-20% of revenues and a disproportionately large amount of margin.)
They don't carry much debt and they recently acquired their next-largest competitor to cement their #3 position in chlor-alkali; their 2 larger competitors, Dow and PPG, are large conglomerates and lack the easy transparency of OLN's balance sheet. And, finally, PPG gives a very thorough report, including pricing details, about a week ahead of OLN, so if you pay attention, you always know exactly what OLN's going to report, within a penny or two, which is nice if you like to trade the latest quarter's multiples before they're published.
OLN's Cl-Al division is going to report earnings of about $0.12 during 3Q. I don't know what their ammunition division is going to contribute; last 2 quarters it was 5 or 6 cents per quarter, but these have been the historically strongest 2 quarters for ammunition in the last 20 years and there is no reason to expect that trend to continue. (Most of the anti-Obama gun nuts who have decided they need to lock and load have, presumably, already done so.) So I see OLN putting in a $0.17 third quarter, which will not cover their dividend, and they have already guided that they expect 4Q to be "very weak."
All well and good - they have cash on hand to cover the next two quarter's dividends. But they've just issued $150 million in debt.
Call me old fashioned - I love a good dividend stock - but I don't like it when a company borrows to finance a dividend. They could be getting ready to do another acquisition, but if you look at their last one they didn't do so hot; they acquired Pioneer's operations for $436 million, a significant discount to that company's 2006 enterprise value, but they only got a year's worth of production out of them - barely had time to iron out the integration issues and restore margins to where they belong - before they had to start idling capacity. Right now they're running 70% capacity and they're going to have to idle more in the next 2 quarters, which means they paid $436 million 3 years ago to acquire plants that they won't be running for a year or two.
I like OLN. I like it well enough that if management really felt like they needed to raise some capital, I'd be happier to see them suspend the dividend to do it. Raising capital at today's rates to pay their current generous dividend doesn't make sense to me; dividends should come out of free cash flow, just as the debt servicing money will come out of future free cash flow that would otherwise be available to common.
Also, if you paid attention to me and picked up OLN at $10, you've enjoyed a nearly 50% run.
I suggest punching out here for a quarter or two, at least until we see what OLN intends to use this money for.