International Flavors & Fragrances: A Hidden Gem

A look at the company's recent quarter, merger and valuation

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Nathan Parsh
Apr 13, 2021
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Looking for undervalued stocks that also have a long track record can lead to interesting companies that operate in industries not often covered in the financial media.

One such name that I discussed recently is International Flavors & Fragrances Inc. (

IFF, Financial). The company supplies flavors and fragrances for a wide range of products, including perfumes, food, soaps and detergents. The company has nearly two decades of dividend growth and recently completed a merger that should enhance its market leadership.

Let's take a closer look at the company to see why I believe it remains an attractive investment option.

A look at results

International Flavors & Fragrances reported fourth-quarter and full-year earnings results on Feb. 10. The company's revenue decreased 1% to $1.27 billion for the quarter, but topped Wall Street analysts' estimates by $4 million. Adjusted earnings per share of $1.32 compared to $1.46 per share in the previous year, but was 13 cents ahead of expectations.

For the year, revenue decreased 1% to $5.1 billion while adjusted earnings per share was lower by 47 cents, or 7.6%, to $5.70.

For the quarter, the Scent business grew 5% to $504.2 million, with currency acting as a 2% tailwind due to the weaker U.S. dollar. Adjusting for an extra week, revenue was up 7% year over year. Consumer Fragrance was the best performer, with particular strength in the Home Care & Personal Wash business. New clients led to growth in Fine Fragrance and strong demand in cosmetics drove growth in Fragrance Ingredients. Scent benefited from higher volumes overall and cost reductions.

The Taste segment was lower by 5% to $765.9 million. Adjusting again for the additional week, sales were lower by just 1%. Food Service remains the weakest part of the company, as restrictions related to the Covid-19 pandemic have severely impacted demand for this business. The rest of the Taste segment had low single-digit growth. North America was the best-performing region, with weakness in Asia, Europe, Africa and the Middle East and Latin America continuing to feel the impact from Covid-19.

International Flavors & Fragrances' balance sheet looks very solid. The company ended the year with total assets of $13.6 billion, current assets of $3.1 billion and cash and equivalents of $650 million. Inventory remained stable at $1.1 billion, similar to the past two years. Total liabilities were $7.2 billion and current liabilities were $1.9 billion. Total debt stood at just under $4.5 billion. The company has just $634 million of debt maturing within the next year. Given the cash on hand and free cash flow (up 13% to $522 million for the year), the company shouldn't have any issue repaying debt and distributing dividends (approximately $323 million in 2020).

Wall Street analysts surveyed by Yahoo Finance expect the company to earn $5.90 in 2021, which would be a 3.5% improvement from last year.

Merger, dividend and valuation analysis

On Feb. 1, the merger between International Flavors & Fragrances and DuPont de Nemours' (

DD, Financial) Nutrition & Biosciences business was completed. DuPont shareholders will own 55.4% of the combined company, with International Flavors & Fragrances shareholders owning the remaining 44.6%.

The new company will continue to trade with the IFF ticker. More important, the merger will position the company as a leader in a variety of consumer categories. In addition to its existing businesses, International Flavors & Fragrances will now be a leader in the areas of personal care, home, food and beverage and health and wellness. In addition, the company will likely experience lower costs due to efficiencies in organization and manufacturing.

What is not yet known about the merger is how it will impact the company's dividend. The share count has now doubled. The goods news is that International Flavors & Fragrances had free cash flow of north of $520 million in 2020. Doubling the amount of dividends distributed would put the free cash flow payout ratio above 100%, but this doesn't factor in free cash flow from the Nutrition & Science business.

Revenue from the new company could more than double to $11.5 billion. While there is a lack of clarity on the policy going forward, the positive impacts of the merger should enable International Flavors & Fragrances to continue to at least pay its dividend. Ideally, investors will have a better understanding of the direction the company wants to take with regard to its dividend on the first-quarter conference call.

As I have discussed previously, shareholders have seen their dividends grow at a compound annual growth of just over 10% since 2011. Dividend growth has slowed in recent years, but International Flavors & Fragrances has raised its dividend for 18 consecutive years. Shares yield 2.2% at the moment, a superior yield compared to the average yield of the S&P 500.

With shares closing Monday at $140.49, International Flavors & Fragrances has a forward price-earnings ratio of 23.8 using analysts' estimates. For context, the stock has a five- and 10-year average price-earnings ratio of 22.2 and 20.

While International Flavors & Fragrances may trade with a premium to its historical multiples, the intrinsic value as calculated by GuruFocus shows a stock that is undervalued.

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International Flavors & Fragrances has a GF Value of $169.01, resulting in a price-to-GF Value of 0.83 using the most recent closing price. Shares have a rating of modestly undervalued from GuruFocus. Reaching its estimated intrinsic value would give shareholders a return of more than 20% not including the dividend yield.

Final thoughts

International Flavors & Fragrances' business was negatively impacted by the Covid-19 pandemic, particularly in the Food Service business, but the remaining businesses have held up well. Market leadership has allowed the company to grow its dividend over a long period of time and the stock currently trades below its intrinsic value as calculated by GuruFocus.

The now completed merger with DuPont's Nutrition & Science should reenforce International Flavors & Fragrances' positioning in its core businesses while providing access to new end markets.

Investors looking for an under-the-radar company with solid growth prospects and an impressive dividend growth streak could do well owning shares of International Flavors & Fragrances.

Disclosure: The author has no position in any stocks mentioned in this article.

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I am originally from the Detroit, Michigan area, before moving to Maryland to begin a career as an educator. This is my 15th year teaching. My wife and I have two young children who keep us on our toes.