After battling strong headwinds in 2013, chemical stocks have begun to bounce back this year driven in large part by the surging shale energy boom and a booming North American market. While any downturn in the economy could weigh on this cyclical sector, market dynamics and management strategies look poised to reward investors with performance gains and respectable dividend yields.
The good news: The fortunes of chemical stocks are improving. The value of U.S. chemical sales is expected to top $1 trillion in 2018, up from $789 billion last year, according to the American Chemistry Council.
The bad news: Sluggish economies in Europe and a slowdown in China have weighed on the global chemicals market.
That said, the outlook for chemical stocks is improving — worldwide chemical production will rise 3.8% this year and 4.1% in 2015. Another good sign: chemical companies are investing heavily in research and development — the ACC estimates that R&D investment will hit $68.7 billion in 2018 – up from $56.6 billion in 2012.
If you’re looking to gain exposure to the sector, look for chemical stocks that have attractive valuations, solid growth prospects and dividends. Here are three chemical stocks to buy for growth and hold for the dividends:
Chemical Stocks: Dow Chemical (DOW)
Dow Chemical (DOW), a 117-year-old multinational, is the second-largest chemical company in the world and the largest in the U.S.
DOW stock soared last week on the release of better-than-expected third quarter earnings of 72 cents a share on a top line of $14.4 billion. Wall Street had expected an EPS of 67 cents a share on revenue of $14.31 billion.
Dow’s biggest immediate challenge is mitigating the impact of lower oil prices on its competitive position — cheap shale gas has given Dow an edge in production costs, but that could change if oil prices continue to decline.
This chemical stock has gained 22% in the past year (though just 7% year-to-date) and has been preparing for potential headwinds by managing costs aggressively. Last week, Dow’s Chairman and CEO Andrew Liveris said the company plans to cut fixed costs by $1 billion over the next three years.
Dow Chemical also is committed to shareholder-friendly policies like a $4.5 billion share repurchase, and a dividend currently yielding more than 3%. Meanwhile, DOW stock trades for 13 times next year’s earnings and at a price/earnings-to-growth ratio of 1.6, which are a little high, but acceptable.
Chemical Stocks: LyondellBasell Industries (LYB)
With its strong portfolio in plastics, LyondellBasell Industries (LYB) has benefited greatly from the low-cost natural gas liquids (NGLs) the company sells to producers of ethylene. Still, lower oil prices could put pressure on LYB’s margins.
On Friday, LYB reported third-quarter earnings of $2.46 a share — 63% higher than the same quarter last year — and revenue of $12.07 billion for the quarter. Analysts had expected an EPS of $2.28 on a top line of $11.7 billion.
LYB boasts some of the sector’s most attractive valuation metrics – it has a forward P/E of less than 10 and a PEG ratio of 0.91, which indicates that the stock might be slightly undervalued. LYB stock has gained 22% in the past year and it has a current dividend yield of 3.2%.
Chemical Stocks: Methanex (MEOH)
Methanex (MEOH) is focused on the supply, marketing and distribution of methanol — a versatile product that can be used in fuel and other derivatives.
Producers like Methanex will increase capacity to more than 50 million metric tons by 2023, according to IHS Chemical. North American methanol production should soar during that time — particularly given the favorable pricing of shale gas compared to coal.
But when it comes to global methanol demand, China is front and center — both as a producer and importer. China’s methanol consumption will more than double from 30 MMT in 2013 to 67.5 MMT in 2023.
MEOH stock is actually off a couple percent in 2014, but trades for a relative bargain at a forward P/# of 10 and a PEG of 0.7 — one of the sector’s lowest. However, MEOH yields just 1.8%, so it should be viewed primarily for its growth potential.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.