Microcap Oil-Dri Corporation Is A Buy For Income Investors

Oil-Dri Corporation Recaptures Lost Margin, Price Hikes On The Way

We’ve liked Oil-Dri Corporation (NYSE: ODC) as a small-cap dividend payer for a long time and the value has only gotten better. The company’s margins took a hit over the past year that helped drive the share price to the lowest level in 7 years and margins are on the mend. On top of that, the company is still reporting volume growth and additional price increases to come so we see a positive bias in the outlook. Oil-Dri Corporation will never be a large or even a mid-cap name but it’s a solid company with an established business that we see paying dividends for many more years to come. At the current price levels, the stock is trading about 18X its adjusted earnings and pays a yield near 4.4%, and the distribution is growing. 

Oil-Dri Corporation Has Stunning Quarter 

Oil-Dri Corporation reported $85.76 million in consolidated revenue which is not much on its own. The crucial details are that this revenue is up 12.5% from last year, 32% sequentially, and a company record. The revenue was driven by an increase in B2B and Wholesale/Retail with increases reported across all major product lines. The company says pricing played a large role in the increase but there was also volume growth as well. On the Retail/Wholesale end of the business, cat litter and sporting applications were the largest contributors to growth. While cat litter should remain steady if not strong, the sporting applications should underpin growth over the next few quarters as outdoor sporting events ramp up. 

Moving down to the bottom line, the news is mixed but that is the worst we can say. The company posted a GAAP loss and negative earnings but a one-off factor is at play. The company logged a non-cash goodwill impairment related to the Wholesale/Retail carrying value that shaved more than $5 million off of the bottom line margin. When adjusted for this factor, the margin grew on a YOY basis and earnings expanded. On an adjusted basis, the operating margin expanded by 480 basis points to 29.5% to drive a substantial increase in YOY earnings. The adjusted EPS comes in at around $0.34 using 7.53 million shares which is up 240% from last year. 

The company did not give any formal guidance for the coming quarter but did give an optimistic outlook. Sales are expected to remain strong over the summer and further pricing increases are on the way. This opens the door not only for sequential growth and an acceleration of YOY growth but for widening margins as well. In our view, that is nothing but good news for the dividend payment. 

Oil-Dri Corporation Has Ammo For Dividend Hikes 

Oil-Dri Corporation is a healthy dividend payer with not only a 4.4% yield but an outlook for dividend growth and share repurchases. The balance sheet is net debt but the leverage is low and cash flow is ample so there are no red flags to be worried about. The cash level came down $7 million to $23 million over the past year but $4.3 of that was used to buy shares in Q3. As for the dividend, the company has been raising the payout for the last 8 years and is due for an increase with the next declaration. 

The Technical Outlook: Short-Covering In Oil-Dri 

The downtrend in Oil-Dri is driven in part by short selling but it looks like the short sellers are starting to cover. The price action going into the report suggests a bottom is in play and price action is moving higher now. Assuming a bottom is in play, resistance is likely at the $26 level. This may hold price action down in the nearer term but we would expect to see it wear down fairly quickly. If the market can get above the $26 level, we see a move up to the $28 to $30 region coming next. If not, this stock may be range-bound at current levels for the next quarter or so.