Is Mesabi Trust the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Mesabi Trust (NYSE: MSB  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Mesabi Trust.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.7% Fail
  1-Year Revenue Growth > 12% 83.8% Pass
Margins Gross Margin > 35% 100.0% Pass
  Net Margin > 15% 97.2% Pass
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 5.35 Pass
Opportunities Return on Equity > 15% 801.8% Pass
Valuation Normalized P/E < 20 20.83 Fail
Dividends Current Yield > 2% 7.9% Pass
  5-Year Dividend Growth > 10% 9.9% Fail
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Mesabi Trust earns a score of 7 and falls just short on a couple of metrics. The trust produces a hot commodity, but some misunderstandings about the lumpy nature of the company's dividend makes it more volatile than it might otherwise be.

Mesabi is a royalty trust with substantial iron ore holdings. Cliffs Natural Resources (NYSE: CLF  ) subsidiary Northshore Mining mines the ore, but shareholders get a royalty interest in the form of quarterly distributions.

For its most recent quarter, the company dropped its dividend to just $0.05, which would imply a yield of only 0.7%. Yet the problem was due to seasonality. The company's first-quarter dividend is always on the low side, and this year, bad weather kept shippers from moving as much ore as normal through the Great Lakes.

Unlike Great Northern Iron Ore (NYSE: GNI  ) , a similar high-yielding iron ore royalty trust that is set to dissolve in 2015 and transfer its assets to ConocoPhillips (NYSE: COP  ) , Mesabi doesn't have a fixed termination date and will not cease to exist within the next 21 years at least.

Certainly, commodity-related stocks like Mesabi have plenty of risk. But investors will now find Mesabi shares down more than a third since March. If you think that global expansion will keep demand for iron ore high, then Mesabi could be poised for a big bounce.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Mesabi Trust to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (5)

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  • Report this Comment On June 10, 2011, at 3:23 PM, panapet wrote:

    Just wanted to add a bit to your writeup.

    Here you go:

    It’s a bit of a complicated story, but the implications are quite big, potentially (the stock could easily double in 6 months). And the market, as far as I can tell, has no real whiff of this yet.

    Back in April, Cliff’s resources settled an arbitration with ArcelorMittal, which accounts for the majority of production from Cliff’s Northshore mine (and hence the majority of volumes subject to the royalty owned by Mesabi against Cliffs). The settlement has several parts.

    In the first part, Cliffs received an award of $263 million related to the pricing of volumes for 2009 and 2010, which were priced too far below world benchmark prices. The problem was that in 2010, pricing moved to quarterly pricing, and the mechanism underlying the agreement were not equipped to reprice based upon quarterly pricing. Benchmark pricing otherwise increased by over 70% in 2010 and through Q2/2011 are up a full 130% over 2009 levels. At some point Cliff’s is going to have to pay off Mesabi as a result of the settlement, and this is expected to be in the vicinity of around 10 million (around 4% of $263 million), and the potential timing is in Q2/11, although this could get deferred, or be spread out to later quarters. This $10 million equates to $0.76/unit for Mesabi.

    The second part of the settlement, relates to pricing going forward – the pricing mechanism for a majority of Cliff’s Northshore volumes (and hence the majority of Mesabi’s volumes) will now be driven off a widely followed benchmark. Thus, in addition to the payment outlined above, Mesabi will get a bump on pricing of volumes going forward. I estimate distributions (before the $0.74 payment) to amount to $0.88 for Mesabi’s Q2/11 (following $0.91 in Q3/10, $0.65 in Q4/10 and $0.05 in Q1/11).

    As a result, Mesabi’s Q2 could be as much as $1.64, while subsequent quarters will also be strong to the extent iron ore pricing hangs in. I have $1.16 for Q3 and $1.28 in Q4. Including the Q1 distribution of $0.05, the total distributions expected for 2011 are $4.13 vs $2.49 in 2010.

    The other part of the story is the relatively low distribution of $0.05 in Q1. As you stated, this was normal and otherwise predictable, but the stock reacted badly as it always does. Q1 is always low for two reasons: 1) the St. Lawrence is frozen in Q1 so there are not a lot of shipments going through, and 2) the way the royalty rates work – on an annual basis, the first million tonnes of sales only get a 2.5% royalty, and this moves up in thresholds to the point where anything above 4 million tonnes gets a 6% royalty – as a result, distributions naturally grow between Q1 and Q4 as the royalty rate moves higher. The nice thing is that you can always buy this thing after a bad Q1 reaction and do reasonably well.

    So, with the above factors combined, I think the market is going to have a big surprise in store for it when MSB reports its Q2 distributions (will be good even without the extra dividend).

    Now, on valuation – Excluding the financial crisis, a normal yield for MSB is around the 5-6% level, considering current Treasury yields at around 3 and a normal spread of around 2-3%. Thus, if I take my $4.13 in distributions at a 5% yield, YOU GET OVER $80!!!!!!

    Disclosure: Long MSB.

  • Report this Comment On June 11, 2011, at 1:18 PM, sunsue wrote:

    Your article said the GNIs assets got to COP in'15. I'm unclear as to what happens to GNIs value at that point; does it go to zero or is it replaced with COP stock? Or something else?


  • Report this Comment On June 14, 2011, at 7:50 PM, raljr1 wrote:

    I bought this at $8 and again at $16. My wife wanted to know why I didn't sell at the peak. I responded by asking where else could I get this kind of reliable return. Based on My investment, I'm realizing as much as 25% just on the dividend.

  • Report this Comment On June 29, 2011, at 7:04 PM, AraFoolio wrote:

    Just a quick note to say that the 7.9% dividend is a thing of the past. The current yield is 0.6%.

    So your pass/fail scenario stands now at 6 out of 10.

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