georgeclerk/E+ via Getty Images

georgeclerk/E+ via Getty Images

Balchem Corporation (NASDAQ:BCPC ) is one of those conservative companies that can be bought and held for decades. Its cash payout ratio is very low thanks to stable profit margins and responsible use of its resources, which has allowed the company to acquire other companies over the years, integrate them, and thus increase overall net sales and cash from operations year after year.

This growth, both in terms of net sales and in terms of cash from operations, has boosted the P/S ratio. This means that the company's shares have become more expensive despite the recent correction as investors are willing to pay more for its sales. Nevertheless, it is very important to point out that it produces nutritional and sterilizing products for critical industries, so the cyclicality of its operations is usually very low.

Therefore, this is not an opportunity for investors in the short and medium-term, but for dividend growth investors with a very long time horizon who want to take advantage of the current correction and acquire a small position and wait to see what happens in the coming quarters and years in order to average down, if the market gives the opportunity. In this sense, it is very important to keep bullets in the chamber as the share price could continue to decline due to the great optimism that is still reflected in the share price.

Balchem Corporation is a developer and manufacturer of specialty performance ingredients and products for a wide range of industries, including nutritional, food, pharmaceutical, animal health, medical device sterilization, plant nutrition, and industrial applications. The company was founded in 1967 and its market cap currently stands at ~$4 billion.

Balchem Corporation logo (Balchem.com)

Balchem Corporation logo (Balchem.com)

The company performs operations under three business segments: Human Nutrition and Health, Animal Nutrition and Health, and Specialty Products. The Human Nutrition and Health segment, which provided 55% of the company's net sales in 2021, manufactures human-grade choline nutrients and mineral amino acid chelated products for nutrition and health applications. The company's acid chelates, specialized mineral salts, and mineral complexes are used as raw materials for the manufacturing process of human nutrition products by third-party manufacturers. The Animal Nutrition and Health segment, which provided 28% of the company's net sales in 2021, manufactures nutritional products for animals by using its microencapsulation and chelation technologies. These products boost animals' health and milk production. This segment also supplies basic choline chloride, which is an essential nutrient for the poultry, pet, and swine industries. The Specialty Products segment, which provided 15% of the company's total net sales in 2021, sells Ethylene oxide as sterilant gas for the healthcare industry. The product is used for sterilizing a wide range of medical devices and is also sold in single-use canisters for autoclave units in hospitals.

Currently, shares are trading at $123.96, which represents a 28.14% decline from all-time highs of $172.50 on November 22, 2021. This recent decline responds to a correction at a time when supply chain issues are reducing profit margins in the company's operations, but it represents a good opportunity to add Balchem to the radar of any conservative dividend investor with a long-term horizon. Despite this price reduction, Balchem continues to generate vast amounts of cash year after year, which enables recurring acquisitions that allow it to continue growing the empire.

In order to understand the path that the company has undertaken in recent years, it is necessary to go back to May 2014, when it acquired Chemicals & Ingredients Company (operating as SensoryEffects), a privately held supplier of customized food and ingredient systems that specializes in powder, solid and liquid flavor systems, creamer and specialty emulsified powders, cereal-based products, and other functional ingredient food and beverage delivery systems, for over $500 million. The company leveraged its balance sheet in order to make the purchase, and a deleveraging stage started, with some pauses along the way to make other smaller acquisitions.

Two years later, in 2016, the company acquired Albion International, a privately-held manufacturer of mineral amino acid chelates, based in Utah, and in 2017, it purchased certain assets of Chol-Mix Kft, a privately-held manufacturer of dry choline chloride, and also acquired Innovative Food Processors, a U.S. manufacturer of agglomerated and microencapsulated food and nutrition ingredients.

In 2018, the company acquired Bioscreen Technologies, an Italy-based manufacturer of encapsulated and fermented feed nutrition ingredients, in order to build the base to expand Balchem's encapsulated nutrients manufacturing capacity in Europe. A year later, in May 2019, the company acquired Chemogas, a Belgium specialty gases company with a strong presence in Europe and Asia, in order to expand its international presence in the packaged ethylene oxide market for medical device sterilization customers. Later in the same year, in December 2019, it acquired Zumbro River Brand, a developer and manufacturer of agglomerated and extruded products in the food and beverage industry, and a market leader in high protein and specialty extruded snacks, cereals, and crisps.

The company's net sales have steadily increased during the past decade, partially boosted by acquisitions, especially SensoryEffects back in 2014. It also achieved an increase in net sales of 9.31% in 2020, during the first coronavirus pandemic year. Around 25% of the company's net sales take place outside the United States, which gives it some geographic diversification.

Balchem Corporation net sales (10-K filings)

Balchem Corporation net sales (10-K filings)

2021 has also been a positive year for the company in terms of net sales as these increased by 13.56% year over year. Furthermore, they increased by 23.27% year over year during the first quarter of 2022, so the positive trend continues so far. This has caused investors to be willing to pay more for the company's sales, which has boosted the PS ratio compared to the last decade, making the stock a bit more expensive than usual from a price-to-sales perspective despite the recent correction.

In this sense, the PS ratio currently stands at 5.069, which means the company generates net sales of $0.20 for each dollar held in shares by investors, annually. This ratio, despite the recent fall as a result of the drop in the share price, is a very high ratio, so it is very important to determine the company's ability to convert net sales into actual cash, which is the main way to justify this ratio apart from the expected growth (estimates point to an increase of ~13% in 2022 and ~5% in 2023).

The company enjoys excellent profit margins that allow it to continuously generate cash, and what is better is that these margins are quite stable. The profitability of a company is essential for the sustainability of its operations, and Balchem has a very good mark in this matter.

In this sense, Balchem enjoys trailing twelve months' gross profit margins of slightly over 30% and EBITDA margins of over 20%. During the first quarter of 2022, gross profit margins declined slightly to 30.06% and EBITDA margins also declined to 21.57%, with which the company's profitability has suffered a bit. Even so, it represents a very slight drop that does not call into question the viability of the business. Furthermore, current supply chain issues and inflationary pressures are macroeconomic events from which few companies can escape right now, so there is no reason to blame Balchem for the small drop in its margins, especially considering the recent increase in net sales.

Certainly, the increase in net sales accompanied by such stable margins has had a very positive effect on cash from operations, which has increased over the past decade in a more or less steady way. Thanks to this cash generation, the company has managed to reduce its debt levels almost completely while continuously making acquisitions, and the management will have to decide what to do with the cash generated from operations after the debt is completely paid.

After the acquisition of SensoryEffects, Balchem's long-term debt increased significantly and the company entered into a deleveraging phase with various pauses in order to keep acquiring other smaller companies.

Since then, long-term debt has declined almost steadily and a recent increase in cash and equivalents has brought net debt to almost below zero. This is thanks to very high cash from operations and a very low dividend cash payout ratio. A company's ability to reduce its net debt over the years is a hard-to-refute way to prove its ability to be profitable, and Balchem has amply demonstrated it year after year. What is more, the company has now more resources than before as interest expenses are decreasing thanks to declining debt.

In this sense, an annual interest expense of ~$2.5 million is a very low figure compared to $160.5 million of cash generated from operations in 2021, and therefore, the debt does not imply any significant risk for Balchem.

The company has steadily increased its dividend payout over the past few years. During the last decade, the dividend increased by 256% from $0.18 in 2011 to $0.64 in 2021, which represented a true way to build wealth for long-term investors holding the shares. The last increase took place in December 2021, when the company announced a 10.3% dividend raise.

The current dividend yield stands at 0.52%. This represents a very low yield and can put many investors off at first, especially dividend investors. But it is very important to keep in mind that the company allocates only a small portion of the cash generated through its operations to the payment of the dividend, thus allowing its expansion through acquisitions.

Despite the large increases that have taken place during the last decade, the cash payout ratio has remained below 20% over the years. This means that the company has allocated less than 20% of the cash from operations for the payment of the dividend and the interest expenses of the debt. Furthermore, interest expenses are about to disappear as the company's net debt is about to cross the zero mark.

Therefore, and taking into account that the company is about to completely pay off its debt acquired in 2014, a new stage of growth is just beginning. Now that the company's interest expenses are very low and that debt is almost non-existent, Balchem will be able to pay the dividend even more comfortably, which will allow it to keep making raises and/or expanding the business.

As a company that has operated for more than 50 years in key industries by supplying raw materials with good margins to large manufacturers, I believe that the main risk lies not so much in the chances of the company's long-term survival, but in the price at which its shares are purchased. To reduce the risk of entering at a too high price, averaging down is a key strategy with Balchem, especially considering that the PS ratio remains relatively high. This means that investors should acquire shares gradually as the price continues to decline, should it continue to do so.

Investors should also consider share dilution as a risk worth taking into account. In this sense, shares outstanding increased by 12% since February 2011 to 32.12 million.

This means that each share represents a smaller portion of the company compared to 2011. Even so, we must take into account that we are talking about a period of time characterized by the rapid growth of the company, so the risk of share dilution should be reduced considerably now that the company has a nearly debt-free balance sheet and a much larger size.

Balchem is a very safe dividend stock for the long term. It supplies key raw materials to large manufacturers of critical industries and has been operating for more than half a century. Its margins are very high and stable, which enables it to generate vast amounts of cash year after year. Net sales have also increased steadily as the management makes careful use of the company's cash resources.

Their dividend payout ratio is very low, but this is because they only allocate a small portion of their cash from operations to dividend payments. Until now, the company has continuously expanded through the acquisition of other companies and subsequent deleveraging of the balance sheet, which has enabled high dividend raises, and a new stage of growth is in the making as the company is about to reach negative net debt again.

For these reasons, I believe the current correction represents a good entry point for investors with a very long-term time horizon, as it could be considered a buy and sleep quietly at night stock with a very safe dividend whose yield is very low but its growth potential is enormous, which is what I think conservative dividend investors should look for.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.