The Right Chemistry for Growth and Income with 42% Upside Potential

What more can an income investor want than a dividend growing at 35% per year and price upside potential of 42% in the coming year.  This is exactly what is possible to owners of Celanese Corp. (NYSE: CE), a global producer of industrial chemicals.  While the current dividend yield is only 1.0%, it will likely continue to grow as EPS is projected to increase 14% in the next year.

The Company has increased its dividends by 140% in the past year and boasts of a 5-year average annual dividend growth rate of 35.1% per year.  The current payout ratio is 21.24%.  Celanese announced a 100% increase in the company’s quarterly common stock dividend on July 25, 2013.  The dividend rate increased from $0.09 to $0.18 per share of common stock on a quarterly basis and from $0.36 to $0.72 per share of common stock on an annual basis.

Celanese posted adjusted EPS of $1.20 per share in Q3, up from a $1.12 gain during the same quarter last year and beating the Capital IQ consensus by $0.05 per share.  Revenue for the manufacturer of thermoplastic polymers slid 1.0% year over year to $1.64 billion, roughly in-line with analyst forecasts.

Looking forward, CE said it expects per-share earnings to continue growing during FY14 through new products and productivity improvement.  Celanese has expanded its polyacetal manufacturing footprint in Asia through investments in joint venture projects in Malaysia, Korea, and Saudi Arabia.  The company signed manufacturing agreements with Malaysia’s Polyplastics Asia Pacific Sdn. Bhd, Korea’s Korea Engineering Plastics, and Saudi Arabia’s Ibn Sina.

We think Celanese can generate above-average revenue growth from geographic expansion and the development of new applications for its products. Due to its size, CE also enjoys a cost advantage in many of its markets. We believe the engineered plastics business has solid long-term growth fundamentals, and that acetate tow remains a stable cash-generating business. Additionally, the European economy seems poised for gradual recovery in 2014.

We look for operating EPS to rise to $4.55 this year, from $3.80 in 2012. Further growth is expected in 2014, with EPS forecast to reach $5.20.   Based on a PE of 15, the 12 month target price is projected to be $78, an increase of 42% from current trading levels.  The Stock has an equity summary score of 8.6out of 10 for a Bullish outlook among analyst.

Celanese Corp. is a global producer of industrial chemicals and has the number  one or two market share in a majority of its products.  Celanese strives to focus its businesses in areas where it has a clear and sustainable competitive advantage to generate long-term earnings growth.  It also continually seeks to optimize its business portfolio to achieve industry, cost and technology leadership while expanding its product mix into higher value-added products. CE’s geographically balanced global footprint is another aspect of its strategy that should fuel future earnings growth, and its global presence is aligned with the current and expected growth of its customers.

The strong cash flow results allowed Celanese to more actively utilize their balance sheet, deploying$96 millionof cash in the quarter to purchase approximately 2 million shares.  Celanese also maintained a cash balance of$1.1 billionand net debt balance of less than$2.0 billion.

The company will cease all manufacturing operations and associated activities at the acetic anhydride plant in Roussillon and at the vinyl acetate monomer (VAM) unit in Tarragona by the end of 2013, and Celanese will proceed to decommission both facilities.

The need for these closure projects emerged from an assessment of Celanese’s overall corporate strategy, which included an assessment of the company’s global manufacturing facilities. Specifically, in support of the company’s acetyl portfolio, the manufacturing footprint strategy favors integrated production sites that provide critical economies of scale.  Celanese expects savings from these closures to be in the range of US $20-30 million in 2014.