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Croda International (LSE:CRDA) isn’t exactly a household name. But the FTSE 100 firm has increased its dividend each year for 30 years and the stock is unusually cheap at the moment.
Furthermore, the company’s competitive position is extremely strong. So is this an opportunity for investors to be greedy when others are fearful?
Chemicals
Croda is a chemicals company. It makes specialist products that help pesticides stick to crops, cosmetics take effect on skin, and pharmaceutical drugs get to the right part of the body.
The firm’s products are extremely difficult to compete with. In a number of cases, they’re protected by patents that make it illegal for any other companies to copy them.
In the case of pharmaceuticals, Croda’s lipids are often specified as part of a drug’s approval programme. That makes them a regulatory requirement and impossible to replace legally.
Given this, there isn’t much of a risk from competition. The reason the stock has been going down recently is due to problems on the side of demand.
Challenges
One of the major challenges Croda is facing is the situation in the US. The current administration is putting pressure on pharmaceutical firms and this might weigh on demand for its products.
More generally, the end markets Croda sells into can be highly cyclical. This can be a good thing – demand from the pharmaceutical sector surged during the pandemic – but it can also be a risk.
For example, commodities prices in the agriculture sector have been low, which has led to lower spending from farmers. But this should be a cyclical issue that I expect to correct over time.
In addition, inventory levels in consumer care products are high as a result of strong previous demand. Again, though, I think this is something that will wear off eventually.
Dividends
I think Croda’s business should pick up, but the big question is when. One of the attractive things about the firm’s strong dividend record, however, is investors get paid to wait.
At least, they do while the company continues to increase its distributions each year. But there’s something investors should pay attention to here.
In 2024, Croda generated £142m in free cash and returned £152m to shareholders. That may not be an immediate problem – the firm has managed downturns before – but it can’t go on indefinitely.
In other words, the firm needs business to pick up in the relatively near future. This might happen, but it isn’t guaranteed.
Cyclicality
I’ve had an eye on Croda for some time. The combination of a strong competitive position and an impressive track record of dividend increases is one that I’ve thought is attractive.
A cyclical downturn isn’t the end of the world – the company has seen plenty of these over the last three decades. But things are starting to get tight in terms of the firm’s shareholder distributions.
Given the ongoing challenges, I think the stock is probably trading at about the right price at the moment. It could be a very good investment, but it’s a bit more risk than I’m looking for right now.
