Microcap Oil-Dri Corporation is a buy for income investors


Oil-Dri Corporation recoups lost margin, price hikes underway

We liked Oil-Dri Corporation (NYSE: ODC) as a small cap dividend payer for a long time and the value has only gotten better. The company’s margins have taken a hit over the past year, which has helped drive the stock price to a 7-year low and margins are on the mend. On top of that, the company is still signaling volume growth and additional price increases to come, so we see a positive bias in the outlook. Oil-Dri Corporation will never be a big or even a mid-cap name, but it is a solid company with an established business that we believe will pay dividends for many years to come. At current price levels, the stock is trading at around 18 times adjusted earnings and yielding close to 4.4%, and the payout is growing.

Oil-Dri Corporation has a beautiful neighborhood

Oil-Dri Corporation reported consolidated revenue of $85.76 million, which isn’t much on its own. The crucial details are that these revenues are up 12.5% ​​over last year, 32% sequentially, and a record for the company. Revenue was driven by an increase in B2B and wholesale/retail, with increases reported across all major product lines. The company says pricing played a big role in the increase, but there was also volume growth. On the retail/wholesale side of the business, cat litter and sports apps were the main contributors to growth. While cat litter is expected to remain flat or even strong, sports apps should support growth in the coming quarters as outdoor sporting events ramp up.

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Scrolling down, the news is mixed, but that’s the worst we can say. The company recorded a GAAP loss and negative earnings, but a one-time factor is at play. The company recorded a non-cash goodwill impairment related to the wholesale/retail book value which reduced by more than 5 million dollars profit margin. When adjusted for this factor, the margin increased on a yearly basis and the profits increased. On an adjusted basis, operating margin increased by 480 basis points to 29.5%, leading to a substantial year-over-year profit increase. Adjusted EPS was approximately $0.34 using 7.53 million shares, a 240% increase over last year.

The company gave no formal guidance for the upcoming quarter, but gave an optimistic outlook. Sales are expected to remain strong over the summer and further price increases are on the way. This opens the door not only for sequential growth and accelerated year-on-year growth, but also for wider margins. In our opinion, this is nothing but good news for the payment of the dividend.

Oil-Dri Corporation has ammunition for dividend hikes

Oil-Dri Corporation is a good dividend payer with not only a 4.4% yield, but also prospects for dividend growth and share buybacks. The balance sheet is net debt, but leverage is low and cash flow is plentiful, so there’s no need to worry. The cash level fell by $7 million to $23 million over the past year, but $4.3 of that amount was used to purchase stock in the third quarter. Regarding the dividend, the company has increased the payout over the past 8 years and is expected to increase with the next statement.

The technical outlook: Short-Covering In Oil-Dri

Oil-Dri’s downtrend is partly due to short selling, but it looks like short sellers are starting to hedge. The price action entering the report suggests that a bottom is in play and price action is now rising. Assuming a bottom is in play, resistance is likely at the $26 level. This can keep the price action going in the short term, but we expect it to wear out fairly quickly. If the market can break above the $26 level, we see a move towards the $28-$30 region ahead. Otherwise, this stock may be limited to current levels for approximately the next quarter.

Microcap Oil-Dri Corporation is a buy for income investors

Should you invest $1,000 in Oil-Dri Co. of America right now?

Before you consider Oil-Dri Co. of America, you’ll want to hear this.

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