Chicago Bridge and Iron: A Solid Company With An 'Out Of Whack' Dividend
- Chicago Bridge & Iron has grown earnings per share by about 16% a year since 2000.
- The dividend history has been largely inconsistent - with just 6% of expected earnings being paid out this year.
- Overall shares are reasonably valued and might offer increased shareholder value in the future.
By means of introduction, the Chicago Bridge & Iron Company (CBI) is an energy infrastructure firm and a major provider of government services. We'd give you three guesses as to where and how the company began, but we don't believe you'd need that many: Chicago Bridge & Iron was founded in 1889 in Chicago, Illinois being initially involved in bridge design and construction. Since that time Chicago Bridge & Iron has expanded into one of the world's largest engineering, procurement and construction companies focusing on the global energy industry - today employing about 55,000 people.
Presently Chicago Bridge & Iron works in four segments: Technology, Fabrication Services, Engineering, Construction and Maintenance, and Government Solutions. While the majority of revenues are derived from the Engineering, Construction and Maintenance segment (61% of last year's revenues) the Fabrication Services piece (23% of revenues) can generate nearly the same operating income. Moreover, the Technology division (just 5% of last year's revenues) actually provides the highest margins and consequentially 20% of operating income. In other words, Chicago Bridge & Iron is diversified in both its service offerings and relative margins.
Now the given demand for any company's offerings can vary widely - and is often the subject of much deeper analysis. With Chicago Bridge & Iron that idea holds, but the company does provide a bit of a short-cut. On April 23rd of 2014 Chicago Bridge & Iron reported a backlog of $30.7 billion - stemming from new awards of $5.8 billion during the first quarter of 2014. Given that the company had revenue of $11 billion in 2013, we believe it's fair to suggest that the company has some pre-assigned work to keep itself busy and profitable. Moreover, this backlog ranges in both size and geography varying from a mechanical and piping construction LNG facility for Chevron (CVX) to grassroots refinery units in China.
Specific performance information will be displayed later in this article, but we felt that the company's dividend policy was noteworthy enough to warrant a mention here. Chicago Bridge & Iron has increased its dividend substantially since the turn of the century - growing its payout by a 14% annual growth rate over the last decade. That's the good news. Here's the bad: on 5 separate occasions during that time the dividend payout was frozen (including a suspension) and today the company is paying out just 6% of its expected profits. So for the current income investor this security certainly wouldn't be seen as ideal.
However, it should be underscored that management has shown an awareness of this ideology. Specifically, CEO Philip Asherman had this to say on the subject:
"We're going to look for more opportunities to return [value] to the shareholders if we have an opportunity as we go through this year in terms of repurchasing [shares] or dividends... Deliver value to shareholders between our flexibility through share repurchases and certainly our quarterly cash dividends, which I know the yield is a little out of whack, so we're going to try to fix that."
"Out of whack" might even be a bit understated as the current yield sits at just 0.35%. However, it might be comforting to know that the dividend could grow much faster than earnings per share for awhile if the company began running out of opportunities. That is, the low payout ratio - while a stumbling block for current income investors - could be an opportunity for the long-term business partner.
Perhaps unsurprisingly - given the low dividend payout association - another interesting note is the idea that Warren Buffett's Berkshire Hathaway (BRK.A) announced a roughly 6% stake in this company about this time last year (May of 2013).
Granted this half a billion dollar stake was likely the result of smaller portfolio managers Ted Weschler or Todd Combs doing - but it remains that Berkshire is a major shareholder in this company. Moreover, according to Berkshire's February 2014 13-F, Berkshire Hathaway now owns 9.5 million shares or three-fourths of a billion dollars' worth - roughly 8.9% of the Chicago Bridge & Iron Company's outstanding shares. If Buffett hopped on board it wouldn't be unimaginable that Chicago Bridge & Iron could become a Berkshire Hathaway subsidiary - Berkshire certainly has the cash. But of course that would be pure speculation - all we can say with any likelihood is that a "Todd" or "Ted" is probably fond of the company.
Looking a bit more objectively at the company, Value Line analyst Sigourney Romaine had this to say about Chicago Bridge & Iron:
"Chicago Bridge & Iron is one of the most oil-and gas-dedicated engineering and construction firms, and will probably continue to benefit for years from rapid development of those resources, both in the United States and worldwide. The company should also realize the last of the planned synergies from the Shaw purchase next year. Moreover, interest costs ought to decline as the company pays down debt."
With the above points made, we felt that it would interesting to view the Chicago Bridge & Iron Company through the lens of F.A.S.T. Graphs™.
Below we can see that Chicago Bridge & Iron has been somewhat cyclical, but overall a very strong grower. Noticeably, the company has two negative years of earnings. However, despite these setbacks, Chicago Bridge & Iron has still been able to grow by about 16% a year since the turn of the century. Additionally, it is clear to see that the dividend (pink line) is very well covered by earnings (green area). Finally, we can easily see the causal relationship between price (black line) and earnings (orange line) - that is, good, bad or ugly, where earnings go price eventually follows. Luckily for Chicago Bridge & Iron shareholders this relationship has been largely positive over any long-term time frame.
With regard to performance, it should be expected - given the above described relationship between price and earnings - that shareholders were rewarded right alongside with the business. In viewing the performance results table we can see that this was precisely the case - a hypothetical $10,000 at the end of 2000 would now be worth about $172,000. This represents a 24% annual growth rate as compared to just 4% yearly growth provided by the S&P 500. Moreover, despite the company's low dividend yield and payout ratio, the Chicago Bridge & Iron investment would have also provided more dividend income than the S&P 500 index.
But of course, as the saying goes, past performance does not necessarily represent the future. Thus it is important to keep an eye on the history of a company while simultaneously focusing on the upcoming prospects. So far we have found Chicago Bridge & Iron to be a strong company with a bit of cyclicality and a low current payout ratio. For a view of what the future might hold, the below Estimated Earnings and Return Calculator can provide some insight.
It's important to underscore the idea that this is simply a calculator, but it does give a general idea of how analysts are presently viewing this company. Most to this point, analysts are expecting earnings per share of about $5.10 and $5.90 for the next two fiscal years; which, incidentally, is quite close to what is being displayed by outside sources. If the earnings estimates materialize as forecast, and Chicago Bridge & Iron is trading at an 18.2 multiple in the future, this would represent an 11.9% annual compound gain including dividends.
Of course, one can change these estimates based upon their own conclusions or scenario analysis. For instance, perhaps you thought the current growth rate was a bit lofty but expected a higher dividend payout ratio in the future. To illustrate this, you might select a 9% growth rate and perhaps a 20% payout ratio starting in 2016.
Here we can see the estimated return drops to 8.8% per year - perhaps more conservative. But the takeaway is that the calculator is meant to provide a baseline for how analysts are presently viewing the company while simultaneously allowing the user to input their own expectations.
Overall we found Chicago Bridge & Iron to be a well-built company with reasonable prospects moving forward - including a substantial backlog. However, the company's dividend history has been spotty and this company certainly wouldn't be appropriate for an investor focused on income today. Management has shown awareness and perhaps even an eventual willingness to focus on higher dividends - but this is in no way guaranteed. Further, today's valuation is roughly in line with how the company has been historically valued. Yet, as always, we recommend that the reader conduct his or her own thorough due diligence.
Disclosure: Long CVX at the time of writing.