Would-be fertiliser mining company Sirius Minerals (LSE:SXX) has gone from bad to worse as an investment and many shareholders have lost their life savings.
There was a modicum of hope for long-term holders of Sirius Minerals last week when the share price spiked in a flurry of excitement. Unfortunately, this was short-lived. October 11 was a particularly exciting day for the stock market. Sentiment was seeing positive vibes around a Brexit agreement between the UK and Europe, world growth worries were lessening as the US-China trade negotiations took an optimistic turn and for Sirius, hope hovered in the form of Qatari investors.
Qatar is already a key investor in SXX via the Qatar Investment Authority, which has a 3.3% stake and Sirius has now signed a 10-year agreement with Muntajat, a fertiliser distribution company owned by the Qatari state. The deal is to supply and distribute POLY4 into Australia, New Zealand and parts of the Middle East, Asia and much of Africa. This is potentially a welcome break for the company, but its problems still exist.
Financial brick wall
Sirius put together $1.2bn stage 1 financing for its planned polyhalite mine in North Yorkshire, with relative ease. Stage 2 financing has struggled to get off the ground and a $500m bond offering failed in September, sliding the Sirius Minerals share price into penny stock status. Unfortunately, the company now faces the dismal choice of a search for alternative funding, which is sure to dilute the share price further, or the devastating slide into administration
It’s never good when a company’s share price slides, but one of the heart-wrenching parts of the Sirius Minerals story is that so many of its shareholders were new to investing. As such, they didn’t have the savvy to recognise the risks of betting everything on one stock and the potential pitfalls of Sirius.
Savvy investors diversify and look for companies that have strong growth potential, without massive capital expenditure. Penny stocks should be avoided as they rarely result in multi-bagger cash rewards. Sirius currently has a share price of 3.4p, it doesn’t offer a dividend for obvious reasons and earnings per share are less than 1p. This is a very risky share and one that I’d avoid at all costs.
High yield dividend stock
An income stock I like for its dividend and dedicated company management is insurer Aviva (LSE:AV). Its current dividend yield is 7.6% and earnings per share growth rate is over 9%.
Its price-to-earnings ratio is 10.7, which may seem cheap, but could be the sign of a struggling company. It was out of favour for a while because returns were low. CEO Maurice Tulloch has been in the position since March and is on a mission to streamline and simplify the business. An annual £300m cost-saving plan is on target and Reuters reported Aviva was planning on selling its Asia operations for £1.94bn, in an effort to focus on more profitable markets. Interest in this has been shown by HSBC, Allianz, Nippon Life and MS&AD Insurance.
Aviva’s trailing earnings per share are sitting at 58p and the current share price is less than its net asset value. Its progressive dividend and cash generative structure are the reasons I think the Aviva share price is a good addition to an income portfolio.
