Shares in this FTSE 100 Dividend Aristocrat are trading at record lows

abstract: With spectacular dividend growth and shares trading at unusually low valuation levels, income investors should take note of this FTSE 100 stock.

Stocks from companies that have increased their dividend per share for 25 consecutive years can be a great source of passive income. Especially if they are cheap.

Croda International (LSE:CRDA) is a FTSE 100 Company that produces specialty chemicals. It has a strong dividend record and has just become historically cheap from a valuation perspective.

Dividends

Stocks don’t become dividend aristocrats by chance. This is not a guarantee for the future, but it is a sign of a strong company.

There are two key advantages with Croda. The first is the number of patents protecting its products – over 1,600 in more than 275 families.

The second reason is the fact that its drug delivery systems are often specified as part of regulatory approval. This makes it impossible for pharmaceutical companies to switch to another product.

This is why Croda has been able to increase its dividend every year since 1991. Despite ups and downs in corporate earnings, the company has continued to pay out more to investors.

The P/E ratio

At first glance, Croda doesn’t seem to be a bargain at the moment. A price-to-earnings (P/E) ratio of 30 is high compared to both the company’s history and the FTSE 100 average.

Croda International P/E 2005-24

Created at TradingView

The problem is that the P/E ratio can be very misleading in this type of business. This is because earnings can be very volatile, which can lead to a dramatic shift in the valuation multiple.

In 2022, for example, the stock traded at a P/E ratio of around 13. But that’s because profits were boosted by unusually high demand for vaccines during the Covid-19 pandemic.

Croda International Earnings Per Share 2019-24

Created at TradingView

As this has subsided, yields have fallen sharply. As a result, the P/E ratio has more than doubled, even though the share price has fallen by around 50%.

Evaluation

For Croda, I think the price-to-book ratio (P/E) is a much more useful valuation metric. The value of the company’s assets minus its liabilities is much less volatile than its net income.

Croda International P/B Ratio 2005-24

Created at TradingView

From this perspective, the stock is historically cheap. With a P/E multiple of almost 2, Croda shares are – from this perspective – cheaper than at any time since 2005.

I think that’s a good indication of how cheap the stock is, but there’s a catch. Outside of the pandemic, the company’s return on equity has fallen steadily since 2010.

Return on equity of Croda International 2005-24

Created at TradingView

Part of this is due to earnings volatility, but a 15-year trend cannot be attributed solely to cyclical fluctuations. The possibility of this continuing is the biggest risk facing investors right now.

A buying opportunity?

The falling return on equity goes some way to explaining why the stock is trading at an ever lower P/E ratio. Croda is no longer generating the return on its assets as it once did.

However, this has not stopped the company from increasing its dividend with spectacular continuity. And for that reason alone, I think passive income investors should pay attention.

All of this leaves me undecided about what to do. But it is clear to me that the current valuation is the best opportunity I have ever seen when it comes to buying Croda shares.