If you like metal, then both Alcoa (NYSE:AA) and Freeport-McMoRan (NYSE:FCX) have something to offer you. Alcoa has gone through a transformation in its business structure, spinning off its value-add metals business into a separate entity and hanging onto its base metal operations going forward. Meanwhile, Freeport-McMoRan continues to move ahead with both its mining and energy businesses, putting together a natural resources giant. With commodities having bounced back somewhat from tough conditions in recent years, investors want to know which of these two stocks is the smarter pick right now. Below, we'll look at Alcoa and Freeport-McMoRan to see how they match up.

Stock performance and valuation

Alcoa and Freeport-McMoRan have both gained some ground recently, but Alcoa has been by far the better performer. The aluminum company has seen its stock climb 57% over the past 12 months, compared to just a 5% rise for the copper and gold miner since May 2016.

Because of recent events in the industry, neither Alcoa nor Freeport has a particularly meaningful valuation based on trailing earnings. Alcoa's current trailing price-to-earnings ratio is more than 100, and Freeport has a trailing earnings multiple in excess of 60.

However, when you incorporate forward projections of earnings, the two stocks' valuations look a lot more reasonable. Freeport trades at a forward earnings multiple of about 8.5, which is low from a historical perspective. Alcoa carries a more typical forward multiple of 14, but that's fairly attractive as well, especially after the stock's run-up. Right now, Freeport looks like the better choice from a valuation perspective, but Alcoa's momentum is nevertheless appealing.

Alcoa display at conference.

Image source: Alcoa.

Dividends

Both Alcoa and Freeport-McMoRan have a similar approach to dividends right now: neither is paying one. Both companies used to pay dividends, but each has made the decision to put capital to work elsewhere.

Alcoa's previous dividend wasn't all that large, and when the company broke itself into two pieces, it found itself needing to keep more of its capital in order to make its financing arrangements work out best. In early 2017, CFO Bill Oplinger said that future decisions would hinge on Alcoa's delevering its balance sheet, and at that point, it might consider either a special dividend or a stock buyback program to return capital to shareholders.

Meanwhile, Freeport cut its dividend in 2015, but some believe that the energy and mining company's rebound in 2016 could have set the stage for a new payout. However, the challenges in Freeport's core industries haven't gone away entirely, and even the substantial rebound in oil prices hasn't brought with it any assurance that conditions could deteriorate again in the near future. For now, investors have to be content with neither Freeport nor Alcoa paying dividends, and it could take a while for that situation to change.

Growth prospects and risk

Freeport-McMoRan and Alcoa both have opportunities to grow, but they will require persistence in order to capture them. For Freeport, the energy industry's slump has let up somewhat, but oil prices around $50 per barrel are still a far cry from where they were just a few years ago, and that continues to weigh on the company's profitability. At the same time, ongoing negotiations with the Indonesian government in connection with the key Grasberg copper and gold mine represent a big uncertainty for Freeport shareholders because of the prominence that the huge mine has within the company's overall business. If the global economy can start to pick up steam, then resulting demand for base metals should help Freeport, but even then, energy markets will also have to cooperate in order for it to make the most of its opportunities.

Meanwhile, Alcoa has already demonstrated the wisdom of its transformative move. First-quarter earnings were favorable, with cost-cutting measures starting to take shape and produce savings. Efforts to restructure its balance sheet also have the potential to pay off for Alcoa, although long-term obligations on Alcoa's pension and retirement benefits will require a more extensive process to resolve. If the construction and infrastructure industry start to recover, then Alcoa will be at the forefront of providing the metals that customers need to complete projects.

Between these two stocks, Alcoa has already seen big gains, and both companies have questions left to answer. With metals behaving better than energy right now, Alcoa has a slight edge, but Freeport has more upside potential if things go right in its industry.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. The Motley Fool has a disclosure policy.