- Specialty chemicals play’s shares are no higher than ten years ago
- Covid and lipids boom is long since gone
- Yorkshire firm seeking to prove the worth of a big disposal, acquisitions and heavy spending
- A peak in capex and cost cutting may represent the start of a turnaround
- Improved cash flow would also support long run of increases in annual dividend
“Specialty chemicals expert Croda can point to a growth streak in its annual dividend that goes back more than twenty years, so you would think the Yorkshire firm is doing something right, but the share price is no higher than ten years ago,” says AJ Bell investment director Russ Mould.
“A meagre 1% increase in the 2025 dividend shows that times are still tough, thanks to a difficult industry environment but also the legacy of a big disposal, acquisitions and a surge in capital expenditure, but plans to cut costs and a peak in that spending could be the starting points for better times ahead.
Source: LSEG Refinitiv data
“The good news is that the full-year figures at least saw management maintain the dividend growth streak, and the numbers come in marginally ahead of analysts’ expectations, which was a nice change after a couple of years of consistent disappointment. Earnings forecasts for 2026 and 2027 also seem to be stabilising.
“However, investors will want a stronger feel for whether the company’s recent struggles are the result of cyclical factors, thanks to a difficult backdrop across the chemicals industry, or structural ones.
“From a cyclical point of view, profits earlier this decade were boosted by demand for lipid nanoparticles, an ingredient that helped to improve the efficacy of the Messenger RNA (mRNA) vaccines developed by the likes of Pfizer and Moderna in the fight against Covid-19. Not surprisingly, demand here has dropped sharply in the past couple of years. The impact of tariffs upon core client industries such as agriculture, pharmaceuticals and cosmetics has not been helpful, either.
“More strategically, Croda has made acquisitions and boosted capacity through heavy capital investment and failed to make the most of the expenditure. Since 2020’s purchase of Spanish fragrances and flavours firm Iberchem and American lipids expert Avanti, Croda’s profit margins and return on capital have come under pressure.
“Increases in costs have outstripped advances in revenues and shared manufacturing capacity has been under-utilised, leading to poor overhead recovery and profit margin erosion. This does prompt worries that the company got more benefit from the volumes provided by the performance technologies and industrial chemicals operation, known as PTC, which was sold off in 2022. Analysts praised the move at the time, as the disposal left Croda with little commodity exposure and a portfolio focused on higher-growth, higher margin consumer care and life sciences markets.
“But it has not worked out that way. Even in 2025, an increase in sales did not really translate into an increase in operating margin, even on an underlying basis, once costs related to putting a manufacturing facility in the US on standby are excluded.
Source: Company accounts
“That move to mothball some lipids capacity in the US suggests Croda is starting to tackle the issues that have bedevilled it, rather than just wait for the cycle to bail it out, as do a reassessment of future capex plans, and a rationalisation of its supply chain and use of leased distribution facilities.
Source: Company accounts
“Lower costs should help margins, and, in conjunction with lower capital expenditure, boost free cash flow, which has ebbed in recent years, to the point where it barely covers the dividend. This, in turn, explains why growth in the shareholder distribution in 2025 is so modest.
Source: Company accounts
“All of this activity helps to explain why the gap between the stated and adjusted operating profit and earnings per share figures is so large. The apparent end to the cycle of earnings forecast downgrades, and the release of a new three-year financial framework, may mean that investors are giving management and the company the benefit of the doubt for now.
Source: Company accounts
“The final issue for potential buyers of the stock to address in valuation.
“The perception that the company was a reliable compounder, with a track record of steady profit and dividend growth, coupled with a long period of interest rates at almost zero, drove the shares to a peak of £104 and a forward price/earnings (PE) multiple of almost 40. An increase in interest rates, lower profits and a derating on the stock as perception changed and earnings were seen as less than dependable then combined to produce the grinding share price decline.
“Even now, Croda trades on 23 times forward earnings for 2026, based on consensus analysts’ earnings forecasts. That is still a very hefty premium to the FTSE 100, even after the long share price slide, as the index trades on closer to 14 times.
“At least Croda’s earnings multiple could be deceptive, since it may be based on a lowly earnings per share figure (EPS) after the woes of the past few years. Croda’s peak EPS was 272p, achieved in 2022 (and that excludes an additional capital gain on the sale of the industrial chemicals business). Croda trades on just 12 times that figure.
“It would be unwise to assume that Croda gets back to that level of earnings power any time soon, given that 2025’s outturn was just 146.2p in earnings a share, even excluding all of the bad stuff.
“A resumption of positive earnings momentum, and return of investor confidence in the business model, could yet lead to the ideal combination of the market willingly paying higher multiples of higher profit forecasts, to the benefit of the share price, and the continuation of the dividend growth streak would also be a further positive sign.
Source: Company accounts, Marketscreener, consensus analysts' forecasts. Excludes special dividends paid in 2015 and 2018
“The forward dividend yield of 3.6%, is now slightly higher than that of the wider FTSE 100, based on consensus analysts’ forecasts.”
