Tuesday, September 16, 2008
10% Dividend Yield
It's time to add to the Southern Copper (PCU) position. Here is the reasoning:
With interest rates likely to fall, risk free CD’s will still attract several investors who are currently existing equity positions out of fear. As of this morning, you can still get 3.75% return on the 6 month, and 4.00% on the 12 month. Balance this against Southern Copper which at this point is running at a lowly P/E of 8.8 (ttm), and a 10% dividend yield, the risk/reward seems relatively attractive.
Will China buy more copper in the future to sustain or lift copper prices? I don’t have an answer to that, I don’t think anyone does. The dividend yield may decrease as the company may elect to tone down their dividend payouts. Cash flow took a slight dive this past quarter to do Capital Expenditures and their continued Rambo like aggression on paying out dividends. Even if it does decrease a few percentage points, the relative returns are still higher than CD’s at the moment.
Based on my discounted cash flow analysis back in February, the worst case valuation I came up with was just over $27/share. Factoring in global demand weakness, softening copper prices, I have PCU pinned at just under $24/share, resulting in a possible 20% upside return based on today’s prices. This along with the high dividend yield payout was factored into my decision today.
Subscribe to:
Post Comments (Atom)
Wikinvest Wire
2 comments:
Interest rates likely to fall? I would think, if the Feds are planning to pump billions of $$$ into the economy, either thru borrowing or printing money (both of which are inflationary), I wouldn't count on interest rates remaining low. Then again, who really knows what will happen in the short run? What a mess!
A mess... yes, it is a total mess. The government won't only be borrowing money, but they'll be leveraging the tax base of every day folks like myself. I do think interest rates may fall further. It's one lever the Fed has yet to exhaust. With the strengthening dollar against other world currencies, the option isn't off the table to drop rates.
Post a Comment