Reader Stock Pick - Southern Copper Company (NYSE:PCU)
7 June 2007Dividends Matter reader John suggested that I have a look at Southern Copper Company which trades on the NYSE under the symbol PCU. He likes the fact that PCU is paying out 6.60%. That sounds like a pretty healthy dividend yield. Let’s check it out.
Company Profile:
From ADVFN Financials:
The Company is an integrated producer of copper and other minerals, and operates mining, smelting and refining facilities in Peru and Mexico.
This is a large cap stock with a market capitalization of $27.28B.
Company Fundamentals:
Let’s see how PCU is able to pay such a generous dividend.
Looking at the Return on Equity, we can see a Jekyll and Hyde happening. For 7 of the 10 years, management had a very pedestrian ROE under 7%. However, for the last 3 years, management has done a superb job at rates of 34% and higher! In 2006, the ROE was a whopping 55.25%. If we were considering investing in this stock, we would definitely have to see what caused this ROE to increase so dramatically in recent years.
Looking at the equity growth rate for the last 10 years, there is nothing spectacular other than in 2004 where the equity growth rate was 30.82%. Every other year was sub-10%.
The earnings per share growth rate has been massive over the last 5 years. In 2004, the earnings per share growth rate was 394.04%!
And looking at the sales growth rate numbers, we see the trend of great growth over the last 4 years. Obviously something worth investigating.
Dividend Fundamentals:
Current dividend yield is sitting at 6.77%. Of course, that blows the yields on the indexes right out of the water.
Considering the sporadic nature of the company fundamentals, we can see that same randomness in the dividend growth rates over the last 10 years. And once again, these last 4 years have been off the map. From 2003 to 2004, the dividend grew 322.61%! Yes, that is right. The dividend went from $0.28 in 2003 to $1.20 in 2004. And the growth continued with the dividend being hiked to $3.19 and $5.13 the following two years. Wow.
Surprise, surprise. Cash flow growth rate increased massively over the last 4 years as well. And that is a good thing. You have to pay dividends in cash!
Historical Dividend Yield:
Alright. At 6.77% dividend yield, this stock must be at an average high dividend yield. Looking at the last 10 years, I discovered an average high dividend yield of 7.27%. Wow. Today’s yield is not even at the high end. In fact, the last two years have had significantly higher dividend yields of 15.41% and 15.47%. Considering how quickly they have grown their dividend over the last 4 years, I can see how those dividend yields were attained.
Since the average high dividend yield does not even match the low dividend yield over the last 2 years, I will use a rate of 12%. The market has demanded a high risk premium for this company in the past.
And let us not forget to check the dividend payout ratio. The dividend payout ratio is very aggressive at almost 75%. I don’t think this company could afford much of a hiccup without having to reduce their dividend.
Using the 12% high dividend yield, then the most I should be willing to pay for this stock is $50.00. At close of Friday, the price was $88.68 which implies that the stock is trading at a premium of 77.36%.
See my calculations here.
Conclusion:
If you are looking to add a high dividend paying stock, PCU would seem to fit the bill at first sight with a yield of 6.77%. However, after delving in the fundamentals of the company, you can see that this is in fact on the low side of what has been available historically.
The fact that this company deals in minerals (cyclical business) and its mines are in South America, you should demand a high risk premium for this company. For me, the purpose of investing in dividend paying companies is to reduce my overall risk and have steady, conservative dividend paying stocks. My concern is that when copper prices fall or some political situation arises in these countries, this dividend will be cut and the stock price will plummet.
Let me know what you think.
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on July 17th, 2007 at 3:04 pm
I purchased PCU a small amount around $52 at the beginning of the year. I sold out at $85. I am pretty conservative dividend inverstor but PCU is too rich for me. I think the company will meet its forcasts for this year as the are based on $3 for copper. Too many risks in my book and I took the profits.