Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, we'll turn our attention to diviersified mining and oil and gas play Freeport-McMoRan Copper & Gold (NYSE: FCX), and I'll show you why this stock could be an income investor's dream.
Not a favorable combination
As you might imagine, being a miner has been difficult over the past year, as metal prices have fallen off a cliff -- all while labor and mine buildout costs have soared. If there is one lone bright spot for miners, it's that lending rates have been near record lows, which allowed many of them to refinance their debt at favorable rates. But that literally has been the only bright spot.
The gold drop-off has been particularly hard to swallow for miners. Newmont Mining (NYSE: NEM), one of the nation's largest gold miners, wrote down its entire Hope Bay project, valued at $1.61 billion in 2012, because of high build-outs costs and added another $1.77 billion in writedowns last quarter from gold stockpiles in its Australian mines because of the falling price of gold.
For other miners, simply the cost of getting their mines up and running has been a chore. Personal holding Thompson Creek Metals (NYSE: TC) is on pace to begin operations in its copper and gold mine Mount Milligan this month, but not after costs to build the mine ballooned from approximately $750 million to $1.5 billion and necessitated the sale of a 52.25% royalty stake in its gold production to Royal Gold over two transactions to raise the cash necessary to commission the mine.
The Freeport advantage
Instead of sitting idly by while gold prices sink, Freeport has remained nimble in its ability to shift its focus and production to take advantage of metals and resources that are far less spot price-dependent than gold.
To that end, perhaps Freeport's biggest opportunity to lock in big long-term gains comes from its $9 billion in completed purchases earlier this year of Plains Exploration & Production, an oil and gas driller with assets in the Gulf of Mexico, California, Texas, and Louisiana, and McMoRan Exploration, which is an ultra-deepwater asset hold in the Gulf of Mexico and used to be part of Freeport before a split in 1994.
Investors and analysts weren't initially thrilled with the deal, considering that Freeport hadn't managed an oil and gas company for practically two decades and, at the time, natural gas prices were still weak. However, nat-gas prices have worked their way higher, and two-year highs in oil prices have investors rethinking their position as long as Plains and McMoRan can deliver.
Plains probably offers Freeport its best chance for success, having paid a handsome $6.1 billion to BP (NYSE: BP) and Royal Dutch Shell (NYSE: RDS-A) in September of last year to secure assets in the Gulf, which should sustain what I figure to be mid to high-single-digit production growth.
McMoRan, on the other hand, will be a considerably larger challenge but does still offer promise. McMoRan is trying to frack what appear to be huge natural gas reservoirs that it's found in the aptly named Davy Jones well at 30,000 feet below sea level. The problem is that at those depths, building containment equipment that would control gas flow and pressure -- and even unclogging the well at this point from mud -- is proving time- and money-consuming. Ultimately, I think this venture will work, but it'll take patience on the part of shareholders.
The other aspect of Freeport's product diversity that stands out is its gigantic copper reserves. Freeport may produce a large amount of gold each year, and it's certainly not welcomed the $600-per-ounce drop from its peak, but copper is its main source of demand. Thankfully, even with China's GDP growth slowing, copper prices have held up while other metals have caved. The reason is that copper has considerably more practical applications than gold or silver, giving Freeport the "demand" that many gold miners have been missing over the past two or three quarters.
In Freeport's most recent quarter, the company reported the sale of 951 million pounds of copper, 173,000 ounces of gold, and 23 million pounds of molybdenum, among other metals that helped propel it to $1 billion in operation cash flow. For the year, Freeport is expected to generate $5.8 billion in operating cash flow, and that's with reduced spot metal prices!
Show me the money, Freeport
Where Freeport's incredible commodity diversity and subsequent operating cash flow really comes into play is with its dividend to shareholders.
But before I even get into the aspect of its dividend, may I point to Freeport-McMoRan's oil and gas CEO, James Flores, who purchased 1 million shares of Freeport stock on the open market in early June. There's little I love more than when officers of a company tie their interests in with shareholders -- especially when approximately $31 million of personal money is put on the line. It usually signals the expectation of good things to come and helps allay shareholder concerns.
Now, on to Freeport's amazing stipend! At the moment Freeport is paying out $0.3125 per quarter -- a level that has had some fluctuation to it over the past decade as metal prices have vacillated. What's amazing about Freeport, though, is that its payout ratio is low enough (currently only 40% of next year's earnings) to allow it to pay one-time special dividends that it refers to as "supplemental dividends" from time to time. In my opinion, Freeport can call them whatever they'd like, because there have been 11 of these supplement dividends since 2004, which have added a total of $3 billion to shareholder payouts in that time span.
As you can see, Freeport's payouts can be a bit "lumpy." You might think this is bad news, but if you're long-term investor there really aren't any worries. This means that even if we include 2009, in which Freeport suspended its dividend, the company paid back more than $17 per share in cumulative dividends to investors between 2004 and 2013 (assuming it doesn't divvy out another supplemental dividend this year). Those dividends helped propel gains since 2004 for shareholders to more than 120%!
Mining stocks might not be the traditional go-to stocks when it comes to dividend income, but with Freeport's wide diversity and forecast for nearly $6 billion in operating cash flow, I see no reason a stock like this can't fuel an income investor's need for cash. This year alone, thanks to its $1 supplemental dividend, Freeport will yield 7.1% to shareholders. With a focus on diversifying its assets and returning capital to shareholders, Freeport is a name investors can trust to deliver over the long run.