NL Industries: A Contrarian’s Gem in the Industrials Sector

In a market rife with volatility and overvaluation, NL Industries (NYSE: NL) emerges as a compelling contrarian opportunity for income investors. With a dividend yield of 5.2%, governance reforms, and operational resilience in niche markets, NL offers a rare blend of stability and upside potential. Here’s why this under-the-radar industrial stock deserves a closer look—and a buy on dips.

The Dividend: A Steady Anchor in a Churning Market

NL’s $0.09/quarter dividend (annualized $0.36 per share) has been a consistent lifeline for income investors, even as the broader industrials sector languishes in low-yield territory. At a current yield of 5.2%, this is over 350% higher than the S&P 500 Industrials average. While the payout ratio of 63% may seem elevated, it is sustainably backed by earnings. In 2024, NL generated $1.19 per share in net income, comfortably covering the dividend.

Crucially, NL’s dividend is not just about yield—it reflects operational discipline. Despite a dip in Q1 2025 free cash flow (FCF) to -$48.3 million, the annual 2024 FCF of $29.1 million highlights the company’s ability to manage capital through cycles. The Q1 2025 shortfall was largely due to non-operational headwinds, including unrealized losses on equity investments and elevated corporate expenses. Focus instead on the 93% capacity utilization at its TiO₂ plants and the 20% year-over-year sales growth in Kronos’ core pigment business—signs that FCF will rebound.

Governance Reinforcement: A Contrarian’s Secret Weapon

Institutional investors often overlook NL’s recent governance upgrades, which could unlock shareholder value. The board’s expansion to seven directors, including two new independent members, signals a commitment to transparency and accountability. This is critical for a company historically dogged by regulatory scrutiny (e.g., the 2025 consent decree). The new leadership brings expertise in environmental compliance and operational turnaround—key strengths for a firm navigating the cyclical TiO₂ market.

Meanwhile, institutional ownership remains underweight, with only 32% of shares held by funds—a stark contrast to sector peers like Huntsman Corp (HUN) at 68%. This creates a low ownership hurdle, meaning a small shift in sentiment could trigger a sharp price rebound.

Demand Resilience: TiO₂ and Marine Security as Hidden Strengths

NL’s two core segments—Kronos’ TiO₂ pigments and CompX’s marine/security components—are underappreciated growth engines.

1. TiO₂: A Niche with Global Reach
2. Volume Growth: Kronos’ TiO₂ sales rose 4% year-over-year in 2024, driven by a 20% surge in sales volumes as global demand for paint, plastics, and paper rebounded.
3. Price Momentum: Average selling prices, though volatile, remain 2% higher than 2023 levels, aided by cost discipline and the closure of underperforming assets (e.g., the Canadian sulfate plant).

4. Integration Gains: The full ownership of Louisiana Pigment Company (LPC) in July 2024 unlocked $64.5 million in non-cash gains, a one-time boost but indicative of strategic asset optimization.

5. Marine & Security: A Government-Fueled Tailwind

6. CompX’s Q1 2025 sales jumped 6%, with towboat infrastructure and government security contracts leading the charge. The $5.9 million segment profit (up from $3.7 million) underscores operational leverage in niche markets.
7. While some security product sales dipped in 2024 due to a lapsed government pilot project, CompX’s focus on repeatable government contracts—less volatile than one-off projects—offers stability.

The Contrarian Play: Buy on Dips, Harvest the Dividend

NL’s valuation is deeply undervalued relative to its peers. At a price-to-FCF ratio of 15.6x (vs. the sector median of 19.0x), the stock trades at a discount despite its cash-generating capacity. The 5.2% yield acts as a floor for downside risk, while the 550% dividend yield premium to industrials creates a powerful income allure.

Action Plan:
- Buy on dips below $14/share, where the dividend yield spikes above 6%.
- Hold for the long term: The TiO₂ and marine markets are defensive in nature, with demand tied to infrastructure spending and industrial recovery.
- Monitor FCF recovery: A rebound in Q2/Q3 FCF (expected post-Q1 anomalies) will validate sustainability.

Risks and Why They’re Overblown

• Currency Fluctuations: The euro’s impact on Kronos’ sales is real but geographically diversified operations (e.g., North American sales growth) mitigate this.
• Regulatory Overhang: The consent decree is a reputational drag, but compliance costs are already factored into earnings.
• Low FCF in Q1 2025: A temporary blip caused by non-operational items, not a structural issue.

Conclusion: A Contrarian’s Dream

NL Industries is a classic “value trap turned gem”—underfollowed, undervalued, and underappreciated for its dividend resilience and niche market strengths. With governance upgrades, a 5.2% yield, and secular demand in TiO₂ and government infrastructure, this is a stock poised to reward patience. For income investors, the message is clear: buy on dips and let the dividend work for you.

The contrarian’s edge? Seeing stability where others see risk—and harvesting dividends while others fret.