OIL-DRI CORPORATION: UNEARTHING IMPRESSIVE GROWTH

By Grant Bailey and the Sick Economist

Artificial intelligence creates huge heaps of opportunity in the stock market. But what if I told you that many of the best opportunities lie primarily outside of the scope of AI? Yes, at this point, practically every sensible person you interact with will tell you AI is a significant development, because it is. But the truth is that the industry of artificial intelligence is still incredibly over-saturated and overpriced. And no, that’s not a bad thing; it means there is greater potential elsewhere. Looking for an example of this “greater potential”? We’ve got one. ODC is taking the spotlight for today’s article. What’s so incredible about this company? Nothing in particular, but that’s part of what makes it such a good buy. Where are investors not looking? Well, I can assure you that most of them are probably more interested in artificial intelligence than a boring old company that specializes in creating products that absorb liquids. As Jeff Bezos pointed out a while back, everyone asks, “What’s gonna change in 10 years?” but nobody asks, “What will not change in 10 years?”. ODC is worth a gander for whoever asks the latter. 

But firstly, what in the world does ODC even do? Oil-Dri Corporation of America develops and sells sorbent products made primarily from clay. However, there is more to it than that; ODC sells clay-based products in industries you’ve never even considered to be applicable, such as pet care, automotive, agriculture, and fluid purification. Management is very creative in constantly finding new ways to leverage materials that have been known to man for millenia. 

Along with marketing products in such entirely different industries, ODC is also a vertically integrated company. This is a huge component to consider, as not many companies can say that about themselves. What this means is that ODC doesn’t have to rely on ANY other company in ANY part of their supply chain; they control everything themselves, from the clay mining to marketing. 

Growth Prospects

Particularly regarding pet care, the future is looking as bright as ever. ODC offers a wide range of pet care products, such as scoopable litters, non-clumping litters, probiotic crystals, and a variety of other pet accessories. But why is this industry so interesting? Well, as the economy continues to experience growing pains, people are finding it more financially difficult to support their own children. So, frankly, instead of having children, many adults are turning to pets as an alternative because of how much cheaper they are. This means that, if inflation continues to spiral out of control and economic conditions continue to worsen, the pet care industry could surprisingly experience an unexpected surge.

What makes ODC even more defensive of a stock is its specialization in fluid purification. Generally speaking, fluid purification is a non-cyclical industry because of how essential its goods and services are. They’ve distributed these types of products to over 60 countries worldwide as well, indicating that ODC doesn’t have to rely completely on America’s economy for its business anyway. This international diversification also guarantees growth for years to come; markets like India and Africa are just now starting to adopt Western lifestyles, which means a lot of fluid purification. ODC provides a huge variety of fluid purification in several different brands/areas, including Bleaching Earths, Silicates, Clarification Media, and renewable diesel.

The Math

But where’s the quantitative appeal? Right here: A debt-to-equity ratio of 0.16 (meaning they have a very healthy amount of debt, well under control), a dividend payout that, aside from one quarter, has grown every quarter since early 2014, and a dividend payout ratio of ~18% (meaning its current dividend is extremely sustainable). What’s even more interesting is that this company is up ~85% over the past year and still has a P/S (price-to-sales) ratio of 2.36, which could actually suggest they have a lot more room to grow, considering their healthy operating margin of nearly 14%.

Obviously, there’s always at least one fair concern with virtually every stock available on the market, so where’s the concern for ODC? Well, if you look at its stock price history, you’ll notice that they’ve struggled considerably over the past week or two. But why? Well, according to MarketBeat’s ODC profile analysis, insiders are starting to sell. Fundamentally, though, that probably makes fair sense; I mean, the stock had soared 24%+ in the month prior. Considering the previous soar, logic would tell you there would have to be some sort of pushback or resistance eventually. 

Another interesting point to mention here is that one person essentially has complete control over the company, since he has majority ownership through a special share structure. The man I’m referring to specifically is Daniel Jaffee. Is this a guy you could trust? We obviously can’t have 1000% certainty, but the numbers would suggest so; since 1995 (which was when Jaffee took over ODC), ODC’s annual profit has grown well over 800%, representing an average annual return of ~27% over the past three decades. 

If you really wanted to be safe and boring, in theory, you could just buy and hold the S&P 500, right? That’s not wrong, but the return potential is still quite different. If you put $10K into the SP 500 30 years ago without reinvesting dividends, it would be worth ~$118K today. If you apply the same scenario to an investment in ODC rather than the SP 500, that number becomes over $135,000. Not a huge difference, but a notable one nonetheless. And, in actuality, this difference is larger than you’d initially believe. Let’s now assume dividends are reinvested over that 30-year time period… what happens now? Your $118K from the S&P500 turns into nearly $195K, and your $135K from ODC turns into $241K. This translates to a scorching 11.12% return, year after year, decade after decade, or essentially doubling your money every 7 years. All from clay and minerals. 

This consideration is meant to emphasize both the difference between an investment in the S&P500 vs ODC as well as the importance of a dividend. To fully capture the power of this compounding, tax free, an investor would be wise to hold ODC in a tax sheltered fund like and IRA or a 401K.

Ultimately, it’s safe to say that this century-old, boring, but steady money-making machine is here to stay. It’s not artificial intelligence, it’s not groundbreaking, and it’s not revolutionary, but it’s just as appealing an investment as any of those revolutionary AI-reliant companies when you delve into the numbers.