Stepan Company

Fat returns with white gold

Before I start with the actual article, I'd like to thank everyone who has already submitted company profile requests. As I said, I still have quite a few public companies on my watchlist that I'd like to present here bit by bit - but there are simply countless good, often boring, but profitable companies that aren't on my radar either. So if you come across an interesting candidate, feel free to send it my way. Today's Stepan Company, for example, was completely unknown to me - so at this point a big thank you to Roman for the suggestion.

The family-run company is a manufacturer of specialty chemicals that are used in a wide variety of products. Among other things, it's the world's largest producer of anionic surfactants, which have excellent cleaning properties and are needed to create foam in detergents, shampoos and the like. Why the Dividend King holds a special license from the American Drug Enforcement Administration and what that has to do with the Coca-Cola Company is something we'll clear up in the article ...

The origins and business model of the Stepan Company

The origins of today's specialty chemicals company go back to the late 1890s, when Alfred Charles Stepan left London behind with his family and emigrated to the United States. At the tender age of just 13, he was already working as an office boy at the Roessler & Hasslacher Chemical Company. Over the years, the curious young man became a valued and highly respected chemist. On April 17, 1909, his son Alfred Charles Stepan Jr. was born in New York City, who would later follow in his footsteps. At the age of 22, he earned his Bachelor of Arts at the University of Notre Dame and then decided to study law at Northwestern University in Illinois. After just one year, however, the subject became too dry for him, which is why he decided to take the plunge into self-employment. He borrowed $500 from his mother, bought two railroad cars full of a special chemical for binding the dust of road dirt and founded his company called Chemical Distributors.

From a small office he rented for $5/month, Stepan sold his chemicals to various companies throughout the Chicago area. After about 3 years of pure distribution, the enthusiastic founder turned to manufacturing chemicals himself. In 1935 he produced his first own oils and fatty acids for tanneries. Business was excellent, and the Stepan Corporation, as it was now called, was able to develop superbly. Within a few years it became the fastest-growing manufacturer of surfactants, a chemical used in many cleaning agents and soaps. More and more, it shifted its focus to specialty chemicals for the consumer industry. It was convinced that this industry was relatively crisis-proof - after all, customers will buy cleaning products regardless of whether there's an economic crisis at the moment or not. This plan worked out, and within a few years it had signed supply agreements with around 2,000 companies, including all the major American consumer goods manufacturers. In 1958 it took the Stepan Corporation public on the New York Stock Exchange to increase its research capital for new products.

One of the new products was to be a promising citric acid that, however, didn't use sugar beets as its base as usual, but sugarcane molasses. The company put an incredible amount of effort, capital and manpower into the research, but unfortunately this time success didn't come. When profits then dropped drastically in the following years, Alfred C. Stepan Jr. stopped the project and refocused the company on the profitable specialty chemicals. In 1973 Frank Quinn Stepan, the founder's son, took over as president and developed a sophisticated growth strategy. Within a few years he bought up numerous companies and business units, which allowed the Stepan Company to quickly gain large market shares. Today the chemicals group is one of the leading global manufacturers of specialty chemicals and intermediates. In fact, the Stepan Company also holds the only license in the USA to import coca leaves. The extracted cocaine is sold to pharmaceutical companies, while the leaves go to the Coca-Cola Company.

How might the Stepan Company develop in the future?

Before I get to this question, I'd like to briefly summarize the business model once more. The Stepan Company makes various specialty chemicals, which are mostly sold as intermediates to other producers and manufacturers. It divides its business into three segments:

1. Surfactants: In this segment the Stepan Company is the world's leading supplier, and it generates the majority of its revenue with surfactants. These are used in consumer products such as shampoos, detergents, perfumes or lotions, but also in industry, for example in insecticides or in oil production.
2. Polymers: Here it handles the production of various polymers that are used for coatings, adhesive production or sealant development.
3. Specialty Products: In this segment the Stepan Company groups together the remaining smaller niche products. For example, it also produces edible oils for the food, nutrition and pharmaceutical industries.

Now let's take a look at the figures for the most recently published quarter (Q4 2020), which at the same time covers the entire fiscal year 2020. Revenue in FY 2020 was 1.86 billion US dollars, which at first glance is only an increase of just under one percent over FY 2019. However, the Stepan Company managed to reduce costs, which is why profit rose from 127 million US dollars to 171 million US dollars (+35 percent). Earnings per share also rose by about 23 percent, from 4.42 US dollars to 5.45 US dollars.

Toward the end of January 2021, the chemicals group completed the acquisition of INVISTA's aromatic polyester polyol business. With this acquisition, the Stepan Company not only bolsters its aromatics business, but can now also call two more production sites its own. Until now the company employed about 2,200 people at 18 sites in 11 countries around the world. Among them are also more than 230 scientists who are constantly researching innovative and modern solutions in order to be able to offer its customers even better and more tailor-made products in the future.

What about the dividend?

Since 1968, Stepan Company shareholders have been receiving a share of the profits in the form of dividends. Since then, the chemicals group has not only managed to pay the dividend every quarter, but also to raise it every year, which is why it now gets to count itself among the coveted Dividend Kings. The current dividend yield of 0.9 percent isn't particularly high, but the dividend growth rate is definitely impressive. Over the last 10 years it comes to a solid 8.9 percent - over a 5-year period it's even 10 percent. At 21.3 percent the payout ratio is also still very low, which is why investors can look forward to many more years of growth.

Conclusion:
Over the years, the Stepan Company has developed into one of the leading manufacturers of specialty chemicals. You probably can't count on extraordinarily high growth rates here, but it should still make for a rock-solid and successful investment. Long-term investors in particular should definitely take a closer look at this Dividend King.