Shares in mining and steelmaking firm Evraz (LSE: EVR) are offering a prospective dividend yield of 12%, based on forecasts for the year to December 2018. And that’s even after the share price has soared by 133% over the past two years (and has nearly six-bagged over five years), with the company having pulled off an impressive turnaround.
With a forward P/E of only around seven on the cards, why aren’t income investors rushing to snap up Evraz shares and lock in such a cracking rate?
For one thing, there are increasing fears in the City that such a high dividend payment is not sustainable and that, like Vodafone after its perplexing years of uncovered dividends, Evraz could be forced into a cut. There are even suggestions of it being slashed to 38 cents per share, which would lower the yield to 5.2%.
That would still be an attractive figure, but the announcement of a cut would surely result in a share price fall, and probably raise the possibility of a down cycle in the iron and steel business.
But are these fears unfounded? In a first-half update on Thursday, the firm defied the naysayers by revealing an interim dividend of 35 cents per share, “reflecting the board’s confidence in the group’s financial position and outlook.”
But that’s against a less-than-rosy background, with operating profit down 47%, though consolidated EBITDA declined by a more modest 22%. But earnings of 22 cents per share (down from 77 cents a year previously) are nowhere near covering that interim payment.
Evraz’s recent success is down to a surging world iron and steel market and soaring prices for the stuff. But it’s a notoriously cyclical industry, and I’d be very wary of buying into a single-commodity market at what might be its peak.
Anglo American (LSE: AAL), on the other hand, seems to have plenty of cash to hand out. Continuing with a share buyback programme revealed on 25 July with the intention of returning up to $1bn to shareholders, the latest instalment announced Thursday amounts to the acquisition for cancellation of 2.6 million shares at £18 apiece.
Anglo American shares have come storming back since their crunch in January 2016, but with this year’s forecast EPS rise of 20% they’d still be on a forward P/E of only around 7.5. That’s only a little above the Evraz valuation, but in this case we’re looking at a predicted dividend that would be 2.4 times covered by earnings and would yield 5.6% — and there’s certainly no City talk of any cut.
Am I not worried about the cyclical nature of the commodities market? It’s a concern, but I see significant safety in Anglo American due to the diversified nature of its operations. It’s responsible for around 40% of the world’s platinum production, but is also a major world producer of diamonds, copper, nickel, iron ore and coal.
I much prefer that to investing in a company whose fortunes are tied to the global rise and fall in demand for a single commodity, as metals and minerals don’t necessarily all move in step.
The Anglo American share price is only a little ahead of net asset value per share too, and coupled with that very undemanding P/E and an attractive dividend, I continue to see it as a long-term buy.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.