Author: Bill DeShurko, 401 Advisor
Covestor model: Dividend and Income Plus
Disclosure: Long VALE
A good portion of my day is filled up scouring several online sites for articles related to dividend stocks. It’s always good to get fresh ideas, and to see what others are saying about our current or prospective holdings. Recently, an article at Business Insider caught my eye, “SoGen Identifies The 40 Best Dividend Stocks in The World”. Pretty bold statement. But for the most part I like SocGen’s economic work, and I am interested in adding some foreign exposure to our holdings in our Covestor Dividend and Income Plus portfolio. After wading through 39 of 40 slides, I did find something that interested me.
The last slide identifies Vale (Pref A), the Brazilian miner, as a stock expected to “…boost its dividend by 32% this year.” SocGen also states its 2011 yield as 7.4%. I’d take a 32% increase on that.
My investment thesis for the year is that the U.S. economy is in a recovery mode, and while China has political issues, economically they have likely bottomed. What had me puzzled is how I missed a commodity stock with a 7.4% yield. When I am looking for candidates online, I always have several other sites open on my browser where I can get more information on the stock and see if it passes several of my screens to become a legitimate buy candidate. I soon saw why I had overlooked Vale.
For the US-traded ADRs of Vale (VALE), according to MarketWatch, Vale's dividend yield is "N/A". At Yahoo Finance, it's 0.2%. Zacks.com shows it at .11%, as does Finviz. So what’s up? Finally at Morningstar I got my answer. Morningstar indicates that in 2011 their only regular dividend payment was in October, at $.0283 per share. However, during the course of the year they also paid out a total of $1.3846 per share in “special dividends”. This is not included in the dividends yield as reported by most services. So now the question is: How likely are they to continue paying their special dividend?
Back to the Business Insider article, which interprets the dividend yield as 3.5%, after foreign taxes and before special dividend payments. Since I get different dividend totals from Morningstar and Yahoo, I’ll go with the 3.5%. Zacks.com calculates a current P/E of 4.9 with historic P/E’s ranging from 31 to 4.1 over the last 5 years.
Vale is the largest iron ore mining company in the world, primarily providing essential metals to the steel industry.
Here is why we have been adding Vale to our Covestor portfolio and client accounts. The Chinese will continue to buy cars. The pace could slow in a recession, but the demand should grow. Only the rate of demand growth is in question. In the U.S., the average age of cars and light trucks is 10.6 years, up significantly from 8.4 years in 1996. Car sales are a big part of steel demand, and car demand should continue to rise, fueled domestically by low interest rates. Vale's earnings are projected to grow by a modest 4.3%, but that is growth, which theoretically supports the same, or higher “special dividends” that were paid out in 2011. A P/E of 4.9 is ridiculously low for a commodity producer when global federal bankers are all on a money printing binge. And Vale pays their dividends in Brazilian Reals, adding a currency bet to the investment.
Caveat: I really don’t know what the dividend payments from Vale will add up to this year, but I’m happy with the 3.5% quoted by SocGen, and anything higher is a bonus. I like the capital growth potential. I am not buying Vale for clients who are living off their dividends, as the regular dividend is too low, and the special dividends less predictable. But for clients looking to grow their portfolios through a combination of capital growth and dividend reinvestment, Vale looks like a very undervalued stock. By paying dividends in a strong foreign currency it adds Brazilian currency exposure to my portfolios. And with its fortunes resting partly on Chinese demand it adds a second foreign component. This is the type of foreign exposure I like for diversification.