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Building materials are often in demand – enough for JHX to offer a hefty dividend.
I’m generally not much for manufacturing companies, or companies that involve building materials or industrial goods. It’s not that I don’t understand the businesses, it’s just that I find them boring.
That, of course, should tip off any Peter Lynch investors, which I also happen to be. In Lynch’s mind, “boring” is good.
James Hardie Industries plc (NYSE: JHX) is a boring company that looks like a good income investment.
It manufactures and sells fiber cement products and systems for building construction in the United States, Canada, Australia, New Zealand, the Philippines, and Europe.
Fiber cement is actually made of cement, sand, and cellulose fibers. It is often made to look like wooden siding or clapboard or even fake shingles. It’s also used as interior linings.
So JHX offers fiber cement products with various patterned profiles and surface finishes to make everything look pretty, from external siding to facades, floors, fencing, columns, and even ceilings.
The products are used for residential and commercial applications. Pay attention next time you visit various stores, warehouses, offices, hotels, libraries, even museums and prisons. Well, hopefully, you won’t visit a prison.
The most visible line here in the U.S. is probably Hardie, which I’ve seen at Home Depot (NYSE: HD).
One big advantage JHX has is that it’s an Irish company located safely abroad. So not only is it not limited to U.S. sales, it also isn’t under pressure from the EPA.
JHX’s profits are growing. Operational EPS rose 20% year over year last quarter. Other numbers were also strong.
Net operating profit was $65.4 million for the quarter and $115.5 million for the first half of the year, increases of 16% and 7%, respectively. EBITDA was $85.1 million for the quarter and $156.3 million for the first half of the year, increases of 17% and 11%, respectively. Net sales were $440.4 million for the quarter and $857.2 million for the first half of the year, increases of 12% for each.
All this, and the company pays a 6.1% dividend annually.
There is some risk, however.
JHX has to contribute $1.1 billion to an asbestos compensation fund. The amounts it must pay to this fund vary from year to year based on the business’ success and free cash flow. The good news is that it seems like that free cash flow can be put to work paying dividends and other expenses first, and then some form of payment may get made from quarter to quarter.
So while I’m not happy about that money flowing out of the company, it is a defined amount. This may also be why the stock is near a 52-week low, and may represent a bargain given the company’s growth numbers.
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