Can Owens-Corning Insulate Your Portfolio?

Owens-Corning Dividend Is Well Worth A Look 

Owens-Corning (NYSE: OC), blue chip stock that it is, has been working on a growth strategy that has the business up 25% versus the pre-pandemic time period. The real takeaway, however, is the company’s cash-generating power, expected improvement in profitability, and the commitment to pay dividends to shareholders and grow the distribution over time. The yield isn’t overly large at 1.7% but it is a safe payout and the growth outlook is robust. Not only is the company aiming to grow its earnings, but to pay out 50% of those earnings compared to the 37% or so it's paying out now. In our view, this has the company on track to extend its 8-year history of increases for the next decade or longer and possibly even reach Dividend Aristocrat status. 

“In the first half of 2022, we generated $624 million of operating cash flow and $412 million of free cash flow,” said Executive Vice President and Chief Financial Officer Ken Parks. “Our strong and consistent cash generation combined with our solid financial position provide us the flexibility to execute on our enterprise strategy, while remaining committed to returning at least 50% of free cash flow to shareholders over time.”

Owens-Corning Is Building Momentum 

Owens-Corning reported a stellar quarter despite softening trends in the housing market. The company reported $2.6 billion in net sales to beat the Marketbeat.com consensus estimate by 75 basis points which is a small margin to be sure. The strength was driven by pricing increases in all segments and volume gains in two. On a segment basis, the Composites segment grew by 23% and is the key growth driver while the insulation and roofing segments grew by a smaller 16% and 11%. 

The key takeaway, however, is that margins widened across the enterprise and the outlook for the 3rd quarter and year is favorable. The company reported a 200 basis point improvement in the EBIT margin and a 100 bps improvement in the EBITDA margin which came in at a strong 25% of sales. This drove a 24% increase in GAAP earnings and a 43% increase in the adjusted earnings which beat the consensus by an equally strong $0.50. The only bad news is that free cash flow is down on a YOY basis but that is due in large part to an increase in the capital return program. The company raised its dividend by 35% at the start of the year which suggests the next few increases could be large as well.

And the outlook for growth remains positive as well. The company did not give specific guidance for the year or for the current quarter but did say it was expecting YOY growth relative to last year’s Q3. Last year’s Q3 is down 1.3% sequentially, however, which opens the door to flat sequential results and a slowdown in YOY growth this year. The takeaway here is that flat sequential revenue would still be up 18% YOY and cash generation is sufficient to maintain a robust dividend growth outlook. 

The Technical Outlook: Owens-Corning Slips On Strong Results 

Shares of Owens-Corning popped in the wake of the earnings release but holders of the stock were ready for the move and used it as an opportunity to sell. The resulting move confirms resistance at the $84 level but not a cap on prices. Price action is also supported at the short-term moving average which could push the action above the current resistance point. In that scenario, this deep-value dividend-growth stock should see its price move up to the $100 level and in line with the analyst's consensus estimates. If not, shares of Owens-Corning could remain range bound below $84 until there is more clarity on economic conditions and the housing market.