As the world’s largest steelmaker, Luxemburg’s ArcelorMittal (NYSE:MT) certainly has scale. It also has remained comfortably profitable after reducing its work force and production across 2009 to “right size” for the recession.
But the math simply didn’t work on the dividend front. With a 2012 EPS forecast of just 62 cents and a dividend that paid 75 cents annually … well, the company simply couldn’t afford to pay its shareholders. As a result, MT slashed its dividend by nearly 75%.
Sometimes, companies can get creative to support a dividend in tough times. But the nature of materials stocks like ArcelorMittal — including high debt loads due to their capital-intensive operations and razor-thin margins thanks to weak commodity pricing right now — simply didn’t allow for the dividends to continue.
This is a very real problem across the board for materials stocks, and one that investors must be aware of. Seeking yield is not a bad idea, but do the math to find out whether the dividends are sustainable in your prospective investments.
To give you an example of other stocks that might suffer a dividend cut, here are two more materials stocks where the dividends simply don’t add up:
Companhia Siderurgica Nacional
Companhia Siderurgica Nacional (NYSE:SID) is in may ways a peer to ArcelorMittal. SID focuses on construction materials in Brazil, including steel but also cement and other products. This materials company pays an annual dividend that varies greatly, and just paid 43 cents a share this past summer for a headline yield of about 7% annually.
However, this was a big drop from 81 cents a year ago and 58 cents in 2010. And looking forward, even that 43-cent annual payout could be in jeopardy due to an EPS slowdown.
SID is scheduled to post an annual loss in fiscal 2012, and is projected to earn just 54 cents a share in fiscal 2013. Even at a perilously high 100% payout ratio, that 54 cents won’t get you back to 2011 or even 2010 levels.
And it’s very likely that with troubles this year, debt levels that continue to climb higher and general softness in steel and iron pricing, that a 100% payout ratio is not in the best interest of the broader business strategy.
There’s still a good six months between now and the next dividend announcement for SID, but it’s worth taking note of the situation now. Because in May before the disappointing 43-cent payout was announced, shares were trading at almost $9. They dropped to the mid-$6 range in a matter of weeks and currently are priced around $5.50.
Clearly investors didn’t want to stick around once this big dividend payer pulled back on the reins.
Southern Copper (NYSE:SCCO) has a nominal yield of more than 9% right now thanks to plans for a blockbuster Q3 dividend of $2.75, payable Nov. 21 to shareholders who buy in before Thursday, Nov. 8. But don’t fool yourself into thinking that payment will last — total 2012 EPS forecasts are around $2.54 right now.
Furthermore, next year’s numbers are supposed to be very similar … so don’t bank on this special payment becoming a habit.
As for the regular drumbeat of dividends, they are very volatile — ranging from 10 cents in Q3 2009 to a high of 70 cents in November 2011 before this upcoming payday. Simple math tells you that even if SCCO wanted to pay 100% of its profits back to shareholders in dividends, that’s a cap of 63 cents a quarter.
The good news is that total debt at this stock isn’t crippling, and even at a payout of just $2 flat each year you have a yield north of 5%. But be aware of the very volatile nature in SCCO dividends, and the fact that this recent payday is not necessarily a signal of huge paydays to come. Especially considering its recent earnings report that showed a 67% slump in profits to tally a mere 26 cents a share on the quarter.
Get Southern Copper’s recent dividend history here, and pay particular attention to the fact that on its own investor relations site, the company calls out the payout ratio as a percentage of earnings. When you’re paying 90% of profits, you better be darn sure that profits are going up … or else dividends won’t be.
Editor’s Note: A previous version of this story failed to take into account the recent split for Plains All American Pipeline (NYSE:PAA). It was mentioned as being at risk, but its payouts are indeed sustainable. I apologize for the error.
- Slumping energy and metal prices are not looking up in the near future as commodities post the biggest declines in five months. (Bloomberg)
- More dividend disappointments beyond commodities. (InvestorPlace)
- On the flip side, here are a few ideas if you’re looking for undervalued materials plays. (Motley Fool)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.