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The Celanese Corporation (CE) cut its dividend because of continued weakness in the Chinese economy, weak demand in the automotive and construction end markets, and too much debt from an acquisition. It had a 15-year streak of increases as a Dividend Contender.

The company’s end market challenges and leverage have caused the share price to drop substantially from its peak in early 2022. The share price fell as investors sold this dividend stock because of worries about when their end markets will recover and fear of a potential dividend cut as safety decreased. We do not anticipate another dividend cut at this point.

Overview of Celanese Corporation 

Celanese is a chemical and specialty materials company that manufactures and sells high-performance polymers. The firm was founded in 1918. Today, it operates globally through two segments: Engineered Materials and Acetyl Chain. Its products include engineered polymers for the automotive, medical, and consumer electronics industries. Celanese also produces and sells acetyl-based products to other industries.

Total revenue was $10,940 million in 2023, and $10,479 million in the past twelve months.

Dividend Cut Announcement

During the third quarter fiscal 2024 results announcement on Monday, Nov. 4, The Celanese Corporation cut its quarterly dividend. The share price dropped 14% in response. The company’s quarterly dividend rate was $0.70 per share before the announcement. The dividend is now $0.035 per share after a temporary 95% reduction. In the quarterly results, the announcement stated the following:

“Celanese will continue to take actions commensurate with the current demand environment. To this end, the Company intends to temporarily reduce the quarterly dividend by approximately 95 percent beginning in the first quarter of 2025. This action is a prudent and cost-effective path forward to support deleveraging.”

Later, in the earnings call transcript, the company stated:

“Despite the many actions that we’ve taken to continue to deliver value, the benefit from these measures has been increasingly offset by the broad and persistent macroeconomic headwinds. Given this dynamic, we intend to temporarily reduce our quarterly dividend beginning in the first quarter of 2025. While we recognize the importance of the dividend to our shareholders, we’ve carefully considered a variety of options and we have determined that this is the most prudent and cost effective measure to support our deleveraging efforts at this time. We will look forward to accelerating the return of capital to shareholders once we have progressed our deleveraging efforts.”

“And given the current market conditions that we’re seeing and the fact that it looks like these are continuing into the early parts of 2025, at least, we felt the need to take further actions. And after a lot of consideration along with the board determined that reducing the dividend at this point was the most prudent and most cost effective options. So that’s really where our focus will remain. It’s driving activities to really rapidly deleverage to 3 time as quickly as we can.”

“And because of that, we are taking all of these actions but we are not getting the cash flow we expected to be on the deleveraging plan that we had planned for. So looking at the dividend, we really did determine this was the most cost effective and prudent way to get back on that cadence of deleveraging that we wanted to do for our business and that’s really what drove the decision around dividends.”

“…the performance we’ve experienced in ’24 and the reduction in free cash flow we’ve had in ’24, although, we have sufficient cash for the debt that is due next year. We just aren’t deleveraging as quickly as we like, right? Our EBITDA is lower. We haven’t been able to pay down additional cash towards the debt. And then if you look at ’25 and beyond there is so much uncertainty. We feel it’s prudent to be prepared for that and to stay on track with our deleveraging plan. And again, the most cost effective and prudent way to do that is by reducing the dividend at this time.”

Effect of the Change

By executing a 95% dividend cut, Celanese sought to lower its dividend to provide financial flexibility in the face of a prolonged downturn in China, and weak demand in the automotive and construction industries. In addition, the leverage was higher than desired because of the acquisition of DuPont Mobility & Materials. 

Celanese is a Dividend Contender, but the company will lose that status in the first quarter of 2025. The annual streak was 15 years in length. The result is less free cash flow is required for the dividend payout, and more can be directed toward debt reduction.

Challenges

As previously mentioned, Celanese is facing a complex economic environment in China, slow sales to the automotive and construction industries, and primarily dangerously high leverage after an acquisition.

China

The Chinese economy is weak and shows little signs of a substantial recovery despite some stimulus efforts. Celanese is impacted because demand for items like ethylene vinyl acetate (EVA) in the solar market is low. The company’s large manufacturing facility in Singapore is idle because of weak demand.

United States

The American housing market is in the doldrums. Annual sales are roughly four million units in 2024 because of high interest rates and low demand. In contrast, sales were between 4.8 and 6.12 million units from 2019 to 2023. Consequently, the construction paint and coatings market has seen sequential quarters of lower demand. 

Similarly, the auto industry has low demand because of high interest rates and elevated car prices. Before the pandemic, sales exceeded 17 million new light trucks and automobiles annually. The quantity plunged to 14.6 million units in 2020 and was even lower at 13.75 million in 2022. Although demand has risen, sales are now about 15 to 16 million vehicles per year. Sales are lower in Europe and China, too. As a result, Celanese’s sales to the industry are down significantly.

Leverage

The firm’s leverage has soared to over 6X from roughly 2.5X after the DuPont Mobility & Materials acquisition for $11 billion in cash in November 2022. The purchase was funded by debt. As a result, the total debt soared from ~$4.2 billion in 2021 to $15.1 billion in 2022. At the same time, interest expenses went from $91 million in 2021 to $405 million in 2022.

However, Celanese’s assumptions regarding the acquisitions were probably too aggressive. They expected leverage to drop below 3.0X in two years and free cash flow to double in five years. Market conditions and trends indicate the assumptions were too aggressive two years after the acquisition.

Dividend Safety

Celanese’s dividend safety declined because of slightly lower revenue, dramatically reduced earnings per share, and greater free cash flow demands. Earnings per share peaked in 2021 at $18.12 but decreased to $15.88 in 2022 and plunged to $8.22 in 2023. However, they are expected to climb to $11.55 per share in 2025, largely on cost-cutting and efficiency initiatives. 

(Click on image to enlarge)

Image Source: Portfolio Insight

As a result, as seen in the chart below, the dividend yield climbed rapidly to over 4%. Although this percentage is not a value usually associated with distress, it was nearly double the five-year average of 2.22%. After lowering the dividend by around 95%, the calculated dividend yield will be around 2.2%. The quarterly rate is $0.035 per share. The yield will be less than the S&P 500 average.

(Click on image to enlarge)

Image Source: Portfolio Insight

The annual dividend now requires about $15.4 million ($0.14 yearly dividend x 110 million shares), compared to $305 million in 2023. In addition, based on consensus 2024 estimates of $11.55, the estimated dividend payout ratio will contract to around 1.2%. We expect the annual difference in cash flow requirements to reduce total debt and improve the leverage ratio until it is less than 3.0X.

The dividend is in a better position and more secure now from an earnings and cash flow perspective. We do not view the equity as at risk for another dividend cut.

Final Thoughts on the Celanese Dividend Cut

Historically, Celanese had decent dividend growth in the cyclical industry. However, continued economic weakness in China, challenging automotive and construction end markets, and overly high leverage have created significant difficulties for the corporation.

The recently announced China stimulus and potential lower interest rates may reverse the malaise, but it will take several quarters of positive trends before the dividend is restored. However, the current economic conditions and operational performance caused Celanese to cut its dividend.

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