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Ashland’s $1 Billion Share Repurchase Plan – Buyback Wednesdays

  • July 5, 2023

Key Insights:

  • Ashland Inc. (ASH) is a chemical company with a market cap of $4.57 billion that serves customers in more than 100 countries.
  • The company has been going through a restructuring process by spinning off and selling divisions to become a simpler and higher-margin specialty business.
  • Profit margins have increased in recent years because of the divestment of less profitable businesses and a reduction in net debt.
  • The effect of customer de-stocking actions across many supply chains continues to materially impact many of the markets it serves.

Ashland Business SegmentsHeadquartered in Wilmington, Delaware, Ashland Inc. (ASH) is a 99 year old American chemical company that provides additives and specialty ingredients worldwide through its Life Sciences, Personal Care, Specialty Additives, and Intermediates segments. The Life Sciences division is the company’s largest, representing nearly 40% of sales in fiscal Q2 2023.

Companies in their growth phase often go on a buying spree. Years later, when growth moderates and they are suffering under a combination of heavy debt burdens and low profitability, they start divesting assets. Ashland falls in the latter category and in recent years the company has undergone a significant transformation, streamlining its operations to focus on higher-margin specialty business. This strategic shift has resulted in notable increases in margins and reduction in net debt.

Divestitures:

To streamline its operations and focus on core activities, Ashland divested non-core businesses, utilizing some of the proceeds for smaller bolt-on acquisitions. These strategic actions resulted in improved profit margins, reduced long-term debt, and an aggressive share buyback program.

  • September 2016: Ashland spun off its Valvoline business in an IPO and then distributed the rest of the Valvoline (VVV) shares to Ashland shareholders in May 2017.
  • September 2019: The company sold its composites business and butanediol manufacturing facility in Marl, Germany, for $1.02 billion to Ineos.
  • October 2020: Ashland divested its maleic anhydride business and manufacturing facility in Neal, West Virginia, to AOC Materials LLC for $100 million.
  • February 2022: Ashland completed the sale of its performance adhesives business to Arkema, a French chemical company, in a $1.65 billion deal.

Share Repurchases:

Ashland has been consistently buying back its shares. The total number of shares outstanding declined by 12.7% during the past 5 years. In September 2021, under the 2018 $1 billion stock repurchase program, Ashland entered into an accelerated share repurchase (ASR) agreement, pursuant to which Ashland paid an initial purchase price of $450 million and received an initial delivery of 3.9 million shares of common stock.

In April 2022, Ashland completed repurchasing a total of 2.15 million shares for a total amount of $200 million. On May 25, 2022, Ashland’s Board authorized a new, evergreen $500 million common share repurchase program that terminates and replaces the company’s 2018 $1 billion share repurchase program, which had $150 million outstanding at the date of termination.

On June 28, 2023, Ashland announced the approval of a new $1 billion evergreen share repurchase program that replaces and doubles an existing $500 million program out of which about $300 million has been utilized to buy shares. The buyback represents around 23% of its market cap at announcement.

Ashland-shares outstanding graph

Source: InsideArbitrage

The company’s preference for share repurchases over dividends as a capital allocation strategy to benefit shareholders is evident through the frequency of buyback programs and the relatively modest dividend.

Dividends: 

Regarding shareholder returns, Ashland has consistently increased dividends over the years. However, management remains cautious with dividends, aiming to maintain a relatively low cash payout ratio to gradually reduce the company’s debt and facilitate share buybacks. The current dividend yield is 1.76% and the payout ratio is 23.30%.

Profitability and Growth:

Ashland’s gross profit margin and EBITDA margin for the trailing twelve months stand at 33.78% and 22.13%, respectively, indicating healthy profitability. Although net income margin has declined compared to the previous year, it remains in line with historical levels. The company is able to pull off a decent 9.36% net margin on a gross margin of 33.78%.

Forward revenue growth of 4.67% and EBITDA growth of  6.22% are not very attractive but the completion of the restructuring phase suggests the possibility of gradual revenue growth in the next few years.

Manageable Debt:

The company has effectively managed its debt by reducing long-term debt through divestitures. With a cash position of $399 million, Ashland’s net debt stands at $930 million. Furthermore, the company has no long-term debt maturities in the next four years.

Q2 FY2023 Results:

Shares plunged early in May as the company released soft second-quarter results. The company has seen a strong quarter from a sales and earnings perspective in the life science segment, offset by weakness in all other segments. Investors were not thrilled by the company revising its forecasts downwards.

Source: Ashland – Investor Presentation

  • Revenue of $603 million was consistent with the prior-year quarter. Only the life sciences segment saw an increase in sales by 18% from the prior year’s quarter. The personal care segment, specialty additives segment and intermediates segment saw a decline in sales by 3%, 12% and 23% respectively from the prior-year quarter.
  • Operating profits are down to $83 million this quarter from $100 million in the same quarter last year.
  • Ashland’s adjusted EBITDA for the quarter was $145 million, down 11% from $163 million in the prior year.
  • Ashland hiked its dividend by nearly 15% to $0.385 per share on a quarterly basis, now supporting a 1.76% dividend yield.

Source: Ashland – Investor Presentation

Outlook for the Fiscal Year:

  • Management expects demand for their pharmaceutical products will remain strong through the second half of the fiscal year.
  • Inventory destocking may continue to create uncertainty for demand in Personal Care and Specialty Additives end-markets.
  • The company has set sales outlook range for the fiscal year between $2.3 billion and $2.4 billion.
  • Adjusted EBITDA outlook range is expected to be between $580 million and $610 million.

Ashland Chair and CEO Guillermo Novo said in a statement,

“Previous expectations that de-stocking would conclude during our fiscal-third quarter have proven to be optimistic. There is still significant uncertainty as to when the de-stocking dynamics will end. Until the de-stocking is behind us, it will remain difficult for us to gauge the true end-market demand.”

He further added,

“While this uncertain environment presents near term challenges, it does not change our longer-term priorities. Our objectives remain clear: focus on the things we can control to maximize our near-term performance, maintain disciplined capital allocation, and increase momentum on our longer-term growth opportunities, especially our innovation platforms. In light of current market conditions, we plan to take additional targeted restructuring actions to reduce costs over the coming quarters and refocus resources on innovation-driven growth opportunities.”

The Bottom Line:

The chemical industry is in a manufacturing recession. Customer destocking is a short-term factor that is affecting Ashland Inc.’s financial results. The company is taking steps to mitigate its impact and it expects demand to rebound in the future.

The stock is down nearly 20% in the first half of the year. Until we start to see consistent revenue growth, it would be worthwhile to monitor how the stock performs in the second half of the year and watch out for any improvements on the destocking front.

The stock trades at a forward P/E of  17.11 and a forward EV/EBITDA of 11.11.

Welcome to edition 66 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

Buyback activity slowed down considerably with 6 new buyback announcements last week compared to 10 in the prior week.

Top 5 Stock Buyback Announcements 

1. Ashland Inc. (ASH): $

On June 28, 2023, the Board of Directors of this chemical company authorized a new $1 billion share repurchase program, equal to around 23% of its market cap at announcement.

Market Cap: $4.57BAvg. Daily Volume (30 days): 656,618Revenue (TTM): $2.40B
Net Income Margin (TTM): 9.36%ROE (TTM): 7.37% Net Debt: $930M
P/E: 19.56Forward P/E: 17.11EV/EBITDA (TTM): 10.58

2. Eco Wave Power Global AB (WAVE): $

 On June 29, 2023, the Board of Directors of this wave energy company authorized a new 555K share repurchase program, equal to 10% of its market cap at announcement.

Market Cap: $14.65MAvg. Daily Volume (30 days): 581,266Revenue (TTM): –
Net Income Margin (TTM): N/AROE (TTM): -23.78% Net Cash: $8.49M
P/E: N/AForward P/E: N/AEV/EBITDA (TTM): -1.87

3. LightInTheBox Holding Co., Ltd.(LITB): $

 On June 29, 2023, the Board of Directors of this online retailer authorized a new $10 million share repurchase program, equal to around 7% of its market cap at announcement.

Market Cap: $136.01MAvg. Daily Volume (30 days): 81,171Revenue (TTM): $557.58M
Net Income Margin (TTM): -9.87%ROE (TTM): -187.77% Net Cash: $57.33M
P/E: N/AForward P/E: N/AEV/EBITDA (TTM): -9.34

4. Imperial Oil Limited (IMO): $

On June 27, 2023, the Board of Directors of this oil company authorized a new $1.46 billion share repurchase program of the company’s Class A common stock, representing around 5% of its market cap at announcement.

Market Cap: $30.09BAvg. Daily Volume (30 days): 422,767Revenue (TTM): $43.52B
Net Income Margin (TTM): 12.61%ROE (TTM): 32.44% Net Debt: $1.59B
P/E: 5.78Forward P/E: 8.22EV/EBITDA (TTM): 3.78

5. Tuya Inc. (TUYA): $

On June 29, 2023, the Board of Directors of this cloud platform provider approved a new $50 million share repurchase program, equal to around 4.6% of its market cap at announcement.

Market Cap: $1.05BAvg. Daily Volume (30 days): 411,731Revenue (TTM): $200.33M
Net Income Margin (TTM): -56.04%ROE (TTM): -11.17% Net Cash: $928.93M
P/E: N/AForward P/E: N/AEV/EBITDA (TTM): -0.89

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