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Why I think this is an underrated FTSE 100 stock

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The stock in question is the FTSE 100 precious metals miner Polymetal International (LSE: POLY). One might think it’s obvious why the share is trading at a relatively low price. There’s a stock market rally underway, and safe stocks are out of favour. Duh. 

But I think it would be a mistake to think of this share as a stock market crash play. A look at POLY’s past performance tells the real story.

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Robust financials

Polymetal International’s financials have been on a rising curve from even before the crash. In other words, we’re looking at a company that can thrive even when it doesn’t have the broader environment firmly in its favour. 

Its revenues have been rising steadily. In 2019, revenues rose by 19% compared to 2018. Earnings have been on the rise too. In fact, for 2018 and 2019, they actually came in higher than the consensus estimate compiled by Financial Times.

Further, forecasts for both 2020 and 2021 are bullish on both parameters. It’s worth highlighting that forecasts are always subject to change. But research analysts have been fairly accurate with Polymetal, which gives me confidence.

POLY generates passive income

It’s not surprising that with robust financial health in place, this FTSE 100 share doubled its dividends in its last update. Its dividend yield is 3.7%. This isn’t a bad yield, I think. In a year when many stocks’ dividend yields went from the top-of-the-heap to zero, dividend stability alone is reason for me to consider buying the stock. 

Moreover, not only has POLY paid dividends through 2020, it’s expected to continue generating passive income for investors this year as well. 

A cheap UK share

Despite this, the stock has a price-to-earnings ratio of 11.2 times. This is way lower than that of the other big precious metal miners. Consider Fresnillo, which has a ratio of 40 times or Antofagasta, which has an even higher earnings ratio of 44 times. 

As a long-time investor, I think it’s one to consider, even if in the short-term there are drops, like right now. Since the stock market rally started, its share price has broadly fallen as the return of investor confidence has moved investors towards riskier assets.

In fact, if I thought to buy the stock solely because of the gold price rally, then I’d be better off avoiding it. But as I was saying above, there’s more to it than just a gold price rally.

Considering the risks

It is, of course, always possible that the overall environment improves so dramatically that precious metals’ prices plunge. This in turn could impact Polymetal’s performance. 

But, I think, the probability for this is quite low. This is especially so because the world is still in a funk. The new coronavirus variants are the biggest threats for 2021, in my view. Not only are they more infectious, there’s a chance that vaccines may not be as effective on them. 

The takeaway

On balance, the odds are in favour of the miner in my view. I already bought shares in Polymetal International, and am contemplating increasing my holdings while its price is still down. 

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Manika Premsingh owns shares of Polymetal International. The Motley Fool UK has recommended Fresnillo. 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.