Updated on June 18th, 2024 by Nathan Parsh
High-yield stocks pay out dividends that are significantly more than market average dividends. For example, the S&P 500’s current yield is only ~1.3%.
High-yield stocks can be very helpful to shore up income after retirement. A $120,000 investment in stocks with an average dividend yield of 5% creates an average of $500 a month in dividends.
Few companies in the specialty chemicals industry have a history of paying consistent dividends over a long period of time.
Kronos Worldwide, Inc. (KRO) is one of the most loyal dividend payers in the specialty chemicals industry, even though this is a tricky industry to navigate.
The company is currently trading with a solid 5.6% yield, meaning it is one of the high-yield stocks in our database.
Kronos is part of our ‘High Dividend 50’ series, where we cover the 50 highest yielding stocks in the Sure Analysis Research Database.
You can download your free full list of all securities with 5%+ yields (along with important financial metrics such as dividend yield and payout ratio) by clicking on the link below:
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In this article, we will analyze the prospects of Kronos Worldwide.
Business Overview
Kronos Worldwide is a company that specializes in the production of titanium dioxide pigments, which are primarily used to enhance the color and brightness of products like paint, cosmetics, and plastics.
It’s quite important to outline the company’s ownership structure:
Kronos Worldwide went public in 2003 and is a subsidiary of Valhi Inc. (NYSE: VHI), which owns 50% of the company’s outstanding stock.
Further, a subsidiary of NL Industries, Inc. (NYSE: NL) holds about 30% of the stock.
Then, Valhi holds about 83% of NL’s outstanding common stock, and a wholly-owned subsidiary of Contran Corporation holds approximately 92% of Valhi’s outstanding common stock.
Finally, a majority of Contran’s outstanding voting stock is controlled directly by Lisa K. Simmons and various family trusts that exist for the benefit of Ms. Simmons.
Thus, shares have a limited trading volume, while the benefits of common shareholders may not be prioritized, which is something that prospective investors should be cautious about.
Overall, Kronos’ results have been volatile but generally favorable. While this is a pure commodity business, Kronos historically has been a strong operator with disciplined cost controls.
Still, the company’s cyclical business model can easily lead to unfavorable trading periods, as was the case throughout most of 2023.
However, the company’s most recent quarterly report showed a return to growth. Released on May 8th, 2024, revenue grew 12.3% to $479 million while earnings-per-share of $0.07 improved from a loss of $0.13 in the prior year.
Price for TiO2 were lower 11% for the quarter, but this was more than offset by a 28% surge in volume as demand improved.
This quarter was much better than the past few, reflecting the first real strength that we have seen from Kronos since 2022. As a result, we are now slightly more optimistic for the company’s 2024 outlook. Despite high interest rates and weak end market demand in certain areas of the business, Kronos appears to be on an improving trajectory.
Growth Prospects
Kronos operates in a very cyclical industry, with its results being highly susceptible to the underlying movement of titanium dioxide prices.
Thus, Kronos has had a fluctuating performance in terms of its earnings-per-share over the years. It has posted periods of earning as much as $2.20 per share in 2018, but also experienced losses, like the company did in 2023.
The company has not made any significant investments or acquisitions that would change its long-term earnings potential. Virtually all of Kronos’ revenue is tied to TiO2, meaning that price and volume swings in either direction weigh heavily on the company.
It also has not done any major repurchases of shares either, which has prevented the potential for growth in earnings-per-share through that strategy.
Overall, we expect Kronos, on average, to post similar earning results as in previous years moving forward.
Competitive Advantages & Recession Performance
Kronos estimates it is the largest producer of TiO2 in Europe, with close to 50% of sales volumes attributable to markets in Europe.
This means that the company has a significant advantage over smaller competitors when it comes to managing its TiO2 supply and being more efficient.
The company also has minimal net debt, which stands close to $239 million as of the end of 2023. Thus, the ongoing rise in interest rates should not be a big threat to the company.
Operating in a highly cyclical industry means that Kronos is susceptible to the impact of a recession.
The company saw a drastic decline in earnings-per-share during the Great Recession:
2007 earnings-per-share: -$1.36
2008 earnings-per-share: $0.18
2009 earnings-per-share: -$0.71
While results did improve in 2008, the company reverted to a loss the very next year. The company performed much better during the worst of the Covid-19 pandemic as earnings-per-share fell just 5% in 2020 before rebounding to growth the very next year.
Dividend Analysis
Kronos has a multi-layered ownership structure, where it is owned by other subsidiary companies, and its main purpose is to distribute profits to the higher levels of ownership, with the ultimate beneficiary being a trust controlled by Ms. Simmons.
This gives increased confidence that the dividend will remain a priority of the Board of Directors, as has been the case during the company’s history.
Kronos did suspend the dividend during the Great Financial Crisis, but it was quickly reinstated in 2010. By 2011, the dividend had already greatly exceeded its pre-2007 levels, while it has either been maintained or increased since. The company last raised its dividend for the March 2022 payment.
Kronos has a projected payout ratio of 121% for 2024. We do not forecast additional dividend increases over the next five years, which would drive the payout ratio to 99% by 2029.
For context, Kronos has a much more reasonable average payout ratio of 49% over the last decade. Even for a company designed to distribute a high percentage of its earnings in the form of dividends, the payout ratio is stretched to the limit in our opinion.
The clean balance sheet and recent relatively strong performance, we believe that Kronos’ is better positioned now to maintain its dividend then it was even last year. However, the high payout ratio for 2024 is not sustainable long-term. Earnings-per-share will need to grow at a higher rate to safeguard the company’s dividend.
Therefore, we believe that the company’s 5.6% dividend could be at risk or temporary suspension in a potential recession or a rough industry cycle.
Final Thoughts
Kronos is a rather interesting company. Due to its multi-layered ownership structure, the company is designed to distribute the majority of its earnings, which has resulted in a consistent stream of hefty payouts over the years.
Despite the cyclical nature of its business model, Kronos has been prudently managed, has little debt on its balance sheet, and has achieved overall decent results even during downturns in its industry.
While a temporary dividend cut is not unlikely if its niche market remains underwater for too long, it’s quite likely that Kronos will continue to provide shareholders with sizable dividends moving forward.
If you are interested in finding high-quality dividend growth stocks and/or other high-yield securities and income securities, the following Sure Dividend resources will be useful:
High-Yield Individual Security Research
Other Sure Dividend Resources
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