Vale S.A.

Vale S.A. (VALE), the Brazil based miner announced today that it would boost its dividend by $6 billion.

Vale is the world’s largest miner of iron ore.  It has metals & mining interests in ferrous/base metals in 24 countries. It has a market cap of $125 billion, making it the second largest miner.

Mining companies  generally do not make very generous dividend payers,  so the Bloomberg story headline that Vale would boost its dividend in 2012 by US 6 billion caught my eye.

There is plenty for income investors to like about this stock:

Even before today’s announcement, Vale already had a generous current yield of 7.77%

5 year dividend growth = 8.12%

5yr EPS growth = 25.35%

The dividend is well covered.  Price to Free Cash Flow (TTM) = 48.37%

The company also has a modest debt.  Total Long Term Debt to Equity ratio = 31.42

All of the above financials make Vale attractive at these levels.

But the real ‘kickers’ that argue for adding Vale to an income portfolio include:

A very low payout ratio: 23%

The low payout,  despite future commodity price volatility allows Vale plenty of wiggle room to increase the dividend.  In fact, Vale have increased the dividend by an impressive 208%  since 2008 alone.  In addition, Vale periodically makes extraordinary dividend payments which it calls ISE’s (interest on shareholders equity).  Today’s 6 billion announcement exceeded the top end of market expectations.  It confirms that CEO Murilo Ferreira and his management team view returning cash to company owners as a high priority. “I have a huge discipline in capital allocation,” Ferreira boasts. “The most important thing for us is to provide the right return to our shareholders.”  The fact that he has backed these statements with hard cold cash bodes well for income investors.

2.  A  very low earning multiple. Trailing P/E (TTM)  = 5.71

Despite recent earnings growth, Vale is still very cheap,  currently trading at May 2010 levels.  The market’s low valuation simply does not reflect the momentum in earnings growth of 25.35% over the 5 years.

Buying a miner is a commodity play.  Despite being diversified into metals production, coal, fertilizers and logistics, future earnings are tied to metals prices.  I believe current commodity prices levels are structural, not cyclical, with demand only intensifying.  And it is not just about China. Vale is well positioned for the long term to grow their earnings.  Following today’s announcement, Vale is, in my opinion, the best value candidate in the metals/mining sector for income investors.  In short,  it is value priced,  has a great current yield – supported by earnings momentum and a low payout ratio.  In addition, management have indicated they are strongly committed to returning cash to shareholders.

Accumulate at this level.

NB: For retirement accounts there is the added bonus of no Brazilian withholding tax for dividend payments.


About globaldividendgrowth

Independent equity analyst focusing on global dividend growth opportunities.
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