You have some in your car, but does it belong in your portfolio?
Valvoline, the maker of the ubiquitous motor oil and other fluids that keep vehicles running, is being spun off by its parent Ashland (NYSE:ASH) in an IPO. Valvoline's market debut will take place this Friday. Here are the whys and hows of the issue.
A long-established incumbent
The spin-off has been making its way through the system for some time. Nearly a year ago, Ashland's board approved the company's split into two. Its specialty chemicals arm will retain the Ashland name, while the Valvoline end is to be christened with the company's traditional moniker.
As you might expect of a brand that's been in existence for nearly 150 years, Valvoline is a well-developed and fairly mature business. In addition to its namesake vehicle and heavy equipment fluids business, the company has an approximately 1,050-store network of quick-lube service stations. It says it's the no. 2 such chain in the U.S. (in terms of store count) behind Royal Dutch Shell's (NYSE:RDS.A) (NYSE:RDS.B) Jiffy Lube.
Although Valvoline has always been, and most likely will remain, an America-focused business, it does plenty of business abroad. Its products find their way onto shelves in roughly 140 countries outside of North America. Over one-quarter of its total sales in 2015 came from those markets.
Overall top line for Valvoline amounted to just under $2 billion for the year, with net profit coming in at $196 million. The company reliably delivers a bottom line well in the black, although its annual revenue over the past few years has been stuck at around that $2 billion level.
For its IPO, Valvoline will sell 30 million shares priced at $20 to $23. The shares will start trading Friday on the New York Stock Exchange under the ticker symbol VVV.
The joint book-running managers of the issue are Bank of America's Merrill Lynch, Citigroup, Morgan Stanley, Deutsche Bank Securities, Goldman Sachs, and JPMorgan Chase unit J.P. Morgan.
This Fool's take
Valvoline won't begin its publicly traded life with a massive share float, as 85% of it will remain owned by Ashland (although the latter plans to eventually spin off that stake to its shareholders).
Valvoline will also start out with a high level of debt. It intends to draw $980 million worth of borrowings, shifting the proceeds to Ashland. The $600 million or so raised by the IPO will initially be utilized to help pay this down. Personally, I tend to shy away from businesses that are burdened in this way.
Although Valvoline states that it intends to pay a quarterly dividend, this will probably be limited -- at least initially -- by its debt servicing needs.
Valvoline has a durable and profitable business, and we can count on the company to remain in operation for a very long time. That said, I don't see a lot of potential for improvement -- vehicle sales might very well be at a peak, limiting revenue growth in motor oil and the like. And those debt servicing needs will affect the company's finances.
Meanwhile, Royal Dutch Shell's Jiffy Lube is the incumbent in the quick-service segment, and I don't imagine that'll change anytime soon, if ever.
So to me, Valvoline is an income stock, a steady performer that pays out a reliable dividend.
The thing is, we don't know how much that dividend will amount to, or if one will even be paid at all in the early days. Considering that, I'd probably hold off on investing in Valvoline, at least until -- if ever -- a reasonably generous dividend policy emerges.