James Hardie flags higher dividends

James Hardie Industries (ASX: JHX) on Monday reported an operating profit of US$52 million in the quarter ending 30 June 2013, a 19% increase on the corresponding period in 2012. The strong result reflected growth in sales volume and prices in the company’s two segments; USA and Europe, and Asia Pacific.

During the quarter, James Hardie, one of the world’s largest manufacturers of fibre cement products for residential and commercial properties, continued the re-commissioning of its Fontana, California plant and completed the purchase of land and buildings at its Carole Park, Brisbane facility. The projects will allow the company to expand production volumes to service anticipated growth in the US and Australia as housing activity increases.

The company saw US net sales revenue and volumes increase by 10%, compared to the previous corresponding quarter, indicating that reported increases in housing starts in the US is contributing meaningfully to the company’s revenue. Similarly, the company noted that the slowly improving housing data in the Asia Pacific region had resulted in a rise in net sales and volume in each of the businesses in the region, though did not specify by how much.

The outlook for James Hardie is increasingly positive; single-family and multi-family home building permits in the US have increased by 25% and 20% respectively in the past year, and Australian detached housing approvals have increased by 16%. Single-family homes and detached houses are the main earnings drivers for James Hardie in the US and Asia-Pacific respectively. The company expects US margins to be above 20% for 2014, based on higher volumes, however it is not expecting to see a substantial increase in Australian sales until the housing recovery gathers more momentum. Based on a rapidly improving US housing market, and a more slowly improving Australian market, the company has forecast FY2014 profit between $US165 and $US194 million, representing an increase of between 17% and 38% on FY2013.

James Hardie reaffirmed guidance of increasing its dividend payout ratio from between 20% and 30% to 30% and 50% of net operating profit starting this financial year. In past years, the company has provided a special dividend to shareholders from funds not utilised in share buyback programs. The company announced a new buyback program in May 2013 which aims to purchase up to 5% of issued capital if the share price is appropriate.  James Hardie confirmed that if the share purchases are not completed during the financial year then consideration will again be given to paying out the capital with dividends. This would result in a yield of around 5%.

Foolish takeaway

James Hardie is heavily exposed to the quickly improving US housing market and is expected to deliver strong earnings growth in FY2014. The company is expanding production facilities and has initiated a share buyback program aimed at repurchasing up to 5% of issues capital. Should the share price remain high, the company may elect to distribute the funds via dividends, as it has done in previous years. The promise of higher dividends and earnings, and the company re-purchasing shares, should provide a catalyst for share price growth in the next 12 months.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

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