BASF is one of those great German industrial companies which many European investors own for its dividend. And I’m no exception to that, because I initiated a position at 45 Euro per share in May last year.
It was a perfect time to initiate a position in BASF SE, because it’s a company that operates in a very cyclical business. Hence, it should come as no surprise that it was heavily impacted by the pandemic and the economic slow down as a result.
In other words, you typically want to buy companies like BASF during a recession.
But this comes with a catch, because their numbers usually look horrible during market bottoms (very high P/E). On the other hand they look very undervalued at a market top (very low P/E).
That’s why it’s really important to nurture your contrarian mindset during market bottoms, because non of the numbers will make sense 😅
But truth to be told, I actually added some shares today after the BASF earnings results. And as you can also notice in the price chart above, it was not at rock bottom.
Hence, in this post I would just like to share my reasons why with you.
BASF Earnings Results
BASF reported strong earnings results in Q2 2021. They grew on all metrics compared to last year and on top of that they also increased some of their guidance.
But last year was an easy benchmark to compare with due to the dip in their earnings in Q2 of 2020.
That’s why I have manually included the 2019 numbers in the table below, because this gives us a better feeling for the true earnings quality we have seen in the last quarter.
|Earnings Item (€)||2021 Q2||2020Q2||2019 Q2|
|Net Income||1.654||-874||268* (5.954)|
|# of shares||918.479||918.479||918.479|
|Operating Cash Flow||2.537||2.242**||1.946|
|Free Cash Flow||1.770||1.516||965|
|Debt / Equity||40%||44.3%||40%|
* excludes sale of business unit for comparison reasons. Figure including the sale is between brackets
** they created 1 bln in positive working capital. This influenced the FCF in a positive way, but can be considered one-off creative accounting.
*** happens once a year in Q2, that’s why it looks so high
As you can see, they really had an outstanding second quarter of the year.
The growth compared to 2019 was equally outstanding and I find this really remarkable considering the current economic environment.
These numbers have boosted the confidence of management, because BASF decided to increase their forward outlook for the remainder of 2021.
What I also like about these numbers is that management was able to pass on the inflation costs to their customers.
This doesn’t happen too often by commodity producers as could be witnessed by Kimberly Clark’s numbers.
Recommendation: I actually created a video about Kimberly-Clark 3 months ago with the title inflation is coming!. Just in case you are interested.
So overall, great numbers. But that triggers the question then: are we observing peak earnings right now? And in that case, shouldn’t I just be patient and wait for a next market crash?
Why I bought some BASF shares after BASF earnings results
I guess you need to see this in context, because I make no single purchase all on its own.
As an example, my last 2 purchases where shares from Philips NV and Alibaba. The first one pays a 2% dividend yield and the second one pays no dividend at all (part of 10% allocation to growth in my portfolio).
At the same time I decided to read my 2020 annual report one more time last week.
This made me realize that at the current pace I’m underinvesting in 2021 according to my plan. This is because my plan consists of three major assumptions:
- An average yield of 3.25% at time of purchase
- A 6% average annual compounded dividend growth rate
- A 50% investment of my salary on a monthly basis
If you take this into consideration, then it’s clear that in the last few months I’ve not been making my average 3.25% target.
This is also because it’s really hard to find attractively valued dividend growth stocks right now.
Hence, I think I started to drift a little bit too far into the “value-investing” mindset and especially with my purchases in Alibaba.
This is in itself really not that bad, but I shouldn’t forget that I’m also investing for dividend income.
Dollar-cost-averaging into dividend growth stocks according to the above 3 bullet points should be its primary focus.
And that’s the simple reason why I decided to buy some additional BASF shares today.
A high quality, but low growth company at a fair price.
Details about my purchase
I bought 20 shares of BASF at 66 Euro per share today.
BASF pays an annual dividend of €3.30 per share which equates to a 5% dividend yield on cost.
The company is expected to earn approximately €6.25 in earnings per share in 2021, so this would mean a 10.5 P/E and a 53% payout ratio.
At the same time it already made an EPS of €3.67 in the first half of this year.
The company has a strong balance sheet with a debt to equity ratio of 40%. They don’t have any weird stuff in there like extreme amounts of goodwill or pension liabilities.
Credit rating agencies also recognize this, because it’s one of those few companies in the materials sector with an A3 credit-rating.
Last but not least, BASF has a dividend growth track record of 13 years. They grew their dividend with an average of 1.92% in the last 5 years, which is not a lot.
That’s why I classify BASF as a high yield, low growth dividend stock.
Just know that they did cut their dividend during the great financial crisis with ~15%, but this was rather just a small blip in their track record.
The year after they increased their dividend again which ended up being more than pre-financial crisis level.
And as you know, those were extreme times. Like last year, when they decided to keep their dividend flat 💪.
Dividend Growth Investing for early retirement is a journey and I’m continuously evaluating my purchases to become a better investor.
My latest reflection was that I started to slightly drift away from my plan due to the lack of attractive buying opportunities.
This is OK, but not for longer periods of time.
Hence, that’s why this purchase is purely focused on buying relatively safe dividend income.
The snowball needs to continue growing on a monthly basis.
Having said that, I’m also quite confident that we will see BASF at 50 Euros again in an upcoming market crash.
But during such time, I rather prefer to increase my holdings in the Tier-1 & Tier-2 companies from my dividend portfolio allocation strategy (i.e. $JNJ, $MSFT, $AD).
I hope this clarifies.
PS: I would like to ask you for a favor. If you enjoy this content, may I ask you to nominate me for the PLUTUS awards? The PLUTUS award recognizes the best blogs in different categories every single year. Being shortlisted for such an award would be a great recognition for me 🙏
Thank you for stepping by and have a great remainder of the week!
European Dividend Growth Investor