It is crisis time in the Eurozone and elsewhere. Stock markets will crash at least as hard as in 2008 when Europe goes into recession. Gold is a crisis hedge, but it drops in a stock market crash also (just not a badly). And gold mining stocks are a great performing asset, but only after most of the stock market crisis has passed because the world is dominated by Keynesian economics. The financial media, government technocrats, and almost all PhD economists practice the voodoo economic religion of Keynesian economics. Keynesian investors flee stock markets in a panic and run to US government bonds. Bonds are bought in dollars. Demand for dollars increases, demand for gold drops. This is an opportunity of immense proportions if you keep your powder dry.
It is gold miners week at www.myhighdividendstocks.com, but not because gold miners are high dividend stocks. Most are no or low dividend stocks. However, gold mining stocks will offer some huge capital appreciation potential once the US and European stock markets crash again. Every central bank in the world is printing money (Dollars, Euros, Yen, Pounds, and Yuan) and the commodity gold is priced in fiat currencies, so as more money is printed the price of gold expressed in fiat currencies goes up. It really is that simple. Gold mining companies can increase their profit margins when the cost of extracting gold from the Earth’s crust goes up a little and the price of gold goes up a lot. But gold mining companies tend to be more volatile than the price of the underlying commodity. They amplify gold’s gains and losses as you will see below.
So what is the best price for several of the gold majors that offers capital preservation and maximum opportunity for capital appreciation with maybe some dividends thrown in for good measure? That’s what I hope to find out this week for you and I.
First up is Goldcorp (GG)
Market price: $51.10
Shares: 809.73 million
Market capitalization: $41.43 billion
Bonds: Goldcorp has very little bonds outstanding
DIVIDEND RECORD
Dividend: $0.045/month ($0.54 annually). Goldcorp just announced a dividend increase from $0.03/mo. to $0.045/mo. http://www.marketwatch.com/story/goldcorp-increases-monthly-dividend-2011-12-05-73400 . They have been paying dividends steadily since late 2003.
Dividend yield: ~1.0% ($0.54/$51.10 market price)
Dividend payout ratio: 23.8% to 52.4% depending on what you measure ($0.54/$2.26 latest EPS = 23.8% or $0.54/$1.03 avg adjusted EPS = 52.4%)
EARNING POWER
(Earnings adjusted for changes in capitalization)
EPS Net inc. Shares Adj. EPS
2006 $0.93 $408 M 441 M $0.50
2007 $0.65 $460 M 709 M $0.57
2008 $2.06 $1,476 M 715 M $1.82
2009 $0.33 $240 M 735 M $0.30
2010 $2.13 $1,574 M 786 M $1.94
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2011 Q1 $0.81 $651 M 809.73 M $0.80
2011 Q2 $0.52 $489 M 809.73 M $0.60
2011 Q3 $0.41 $336 M 809.73 M $0.41
2011 Q4 (E) $0.64 E $518 M E 809.73 M E $0.64 E
Goldcorp’s six year average adjusted earnings* is $1.27 per share
Consider contrarian buying at $10.16 (8 times average adj. EPS)
Consider value buying at $15.24 (12 times average adj. EPS)
Consider speculative selling at $25.40 (20 times average adj. EPS)
Goldcorp is trading at 40.2 times average adjusted earnings. This is highly SPECULATIVE despite the bull market in gold.
* includes 2011 4Q Reuters concensus earnings estimates of $0.64 per share
BALANCE SHEET – That is a pretty good looking balance sheet
Book value per share: $25.76
Price to book value ratio: 1.98 (not bad, but closer to 1.00 is desirable)
Current Ratio: 3.82 (latest quarter; over 2.0 is good)
Quick Ratio: 2.65 (latest quarter; over 1.0 is good)
Debt/equity Ratio: 0.03 (awesome)
CONCLUSION – Goldcorp bottomed in the $17.00 dollar range in October 2008 several months before the US stock market bottom in March of 2009. That represented the best value entry into Goldcorp since late 2008. The gold price will go down at least half of the percentage of the stock market’s decline. This happened in 2008-2009. US stocks dropped about 50% and gold dropped about 25%. However, Goldcorp dropped even more than the broader market or gold. It dropped almost 65% from $48.29 in July of 2008 down to $17.01 by October 2008. Don’t think that it happen again. Wait for another bottom near value territory at $15.24 per share. Goldcorp would be yielding about 3.5% if it keeps its new dividend rate at such a low price. The good news is that gold will continue to go up in price as the world’s sovereign debt crisis worsens, but you have to buy extremely low to preserve your capital when purchasing mining stocks.
DISCLOSURE – I don’t own Goldcorp (GG) now, but I did own it a few years ago.
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