BASF (MIL:BASF) (Worldwide High Dividend Yield Value). Founded in 1865, BASF is a global chemicals company with 122,404 employees operating in over 80 countries around the world. It is perhaps best known for its Verbund business model, which combines much of the chemical value chain into a single large facility. This allows for easy transportation of feedstocks and intermediate chemicals, as well as efficient power generation – all of which saves the company money. The company operates six Verbund sites with a seventh (a second site in China) on the way. BASF was traditionally a very complicated company to analyze, with 13 operating divisions reported in five segments. However, the business has changed and the new CEO, Dr. Martin Brudermüller, announced a new reporting structure that has simplified company reporting and also increased accountability at each of the new segments. In addition, BASF plans to dispose of its oil & gas business, which also will make the business easier to understand and perhaps more attractive to investors.
BASF produces chemicals and fertilizers, which are the building blocks for many products that are indispensable in our everyday lives. The company has stated that in roughly 75% of its businesses, it is in the first, second or third position in terms of market share. BASF is constantly shifting its portfolio of businesses, exiting low value-add or commodity businesses and focusing on attractive growing businesses or businesses where it has a cost advantage from its Verbund production sites. The company’s announced disposal of its oil & gas business and the recent acquisition of the agricultural chemicals business from Bayer are both examples of the company’s portfolio management in action.
While chemicals can be a cyclical business, BASF appears to be somewhat less cyclical than its peers. The company traditionally operates with a very conservative balance sheet, and although BASF did add some leverage with the acquisition of assets from Bayer, we expect the firm to return to its historically low level of leverage within the next two years.
At purchase, BASF was trading at approximately 70% of our estimate of its intrinsic value, at roughly 9.2X trailing twelve month earnings, and 1.5X book value (a historic low); had an owner earnings yield of approximately 8.8%, and paid an above-average dividend yield of around 5.4%, making it appropriate for the Worldwide High Dividend Yield Value Fund. The company expects to grow EBITDA 3%-5% per year for the next several years, and we expect the company to grow its intrinsic value at a similar rate. In addition, there was a significant amount of insider buying in late 2018. The CEO, the CFO, the Chairman of the Supervisory Board, and the former CEO all purchased shares at prices higher than we paid for our shares.
From Tweedy Browne (Trades, Portfolio)'s March 2019 annual report.
