The dip of the DAX in the past weeks turned out to be another good buying opportunity for me: After a disappointing release of the latest industrial production figures for the German economy and more reserved IMF growth forecasts for the global economy, the DAX lost almost 15% within just a few weeks: Down from a record of slightly above 10,000 back in July to slightly below 8,600 last week. In the meantime, we are back at a level close to 9,000. Overall, industrial stocks were among the biggest losers.
Unfortunately, the stock went further down to a level of EUR 65, which would have been even a better bargain. But, as usual, it’s quite difficult to time the market. After the stock slowly recovered back to EUR 70, it went 3% down again following the quarterly earnings release today.
Based on the earnings release, the Company cut its profit targets and abandoned its sales target for next year. Management signaled a weaker demand for basic, specialty and agricultural chemicals. According to the CEO “the reasons for this weak global economic development are obvious: Reduced growth dynamics of emerging markets and a delayed recovery in the European economy.” After all, BASF as a cyclical stock, is reflecting the state of the global economy and as growth prospects are weakening, so are the Company’s prospects.
I remain confident in BASF’s fundamentals and despite a slightly darker business outlook, I believe the Company is well prepared for any market scenario. Just to give an example: In 2009, the dividend was reduced by 13% (from EUR 1.95 to EUR 1.70), but it was quickly raised again in the following years. Investors holding on to the stock during the financial crisis were rewarded with more than 12% annual dividend growth ever since.
As of today, BASF represents one of the rather small positions within my portfolio. It's considered to be a cyclical investment and based on the somewhat unclear overall market situation, I am of the view that it’s better to be a bit cautious and keep some more room for further additions. That said, I believe, the Company remains one of the candidates that could be worth injecting some more money when times get rougher.
I take additional comfort in the stock based on the following:
- World’s leading international chemical company
- Current market capitalization of EUR 63bn
- S&P A+ investment grade rating
- 12x price-earnings ratio
- Healthy equity ratio of 43% as per FYE 2013
- Annual turnover of EUR 74bn in 2013
- Net profit of EUR 4.8bn (6.5% margin)
- 50% dividend payout ratio in 2013
- Dividend was raised 15 out of 18 times since 1994 (from EUR 0.36 to EUR 2.70 in 2013)
- Added 12 stocks for a price of EUR 69.67 generating a yoc of 3.88% based on 2013 dividend
