Today’s article continues my series on the DOW 30 companies. I take a look at aluminum producer Alcoa. I’ll bet you didn’t know that Alcoa has a pretty dark past regarding the introduction of fluoride into your local drinking water. Here is the link if you’re interested: http://www.lewrockwell.com/rothbard/rothbard85.html
Alcoa’s earning have suffered greatly since the Panic of 2008, its dividend yield is smaller than the S&P 500 average, they cut the dividend big time every crisis, and their balance sheet is not strong. The return of a worldwide recession will crush Alcoa’s share price further. Read on to see how I came to this conclusion.
Alcoa (AA)
Price: $8.49
Shares: 1.07 billion
Market capitalization: $9.06 billion
What does the company do: Alcoa is the largest player in the global aluminum market, producing 20% of the world's alumina and 10% of its aluminum. Alcoa is involved in bauxite mining; alumina refining; aluminum smelting; and producing aluminum products such as beverage cans, aerospace components, and auto and building products. The company has operations on every continent and has been actively expanding its operations in lower-cost regions such as South America and the Middle East.
Morningstar’s take: Alcoa is one of the top players in the aluminum industry, as the largest producer of alumina; a major smelter of aluminum; and a leading manufacturer of aluminum products for beverages, cars, aircraft, and building construction. The company's size and vertical integration enable strategic advantages such as lower input costs, greater efficiency, and access to financial resources. But, like all commodity industries, aluminum is a challenging business, as profitability is linked to cyclical demand and volatile price movements.
Bonds: $8.4 billion outstanding
Times interest earned: Alcoa earned $611 million in 2011 and paid $524 million in interest expenses in the same year. This means that Alcoa only earned 1.16 times its interest expenses in 2011. The interest expenses are a threat to the dividend. The dividend is threatened when net income is less than five times interest expenses.
Preferred stock: none.
DIVIDEND RECORD: Alcoa has a history of huge dividend cuts. In 1997, they cut their dividend 50% from $0.06 to $0.03. One year later they cut their dividend by 66% from $0.03 to $0.01. They grew the dividend from $0.01 to $0.17 over the next decade, but then they had another huge 82% dividend cut from $0.17 to $0.03 in Q2 2009.
Dividend: $0.03
Dividend yield: 1.4% ($0.12 annual dividend / $8.49 share price)
Dividend payout: 22% ($0.12 / $0.55 2011 EPS) –OR- 16% ($0.12/$0.76 average earning power) Alcoa does not pay a substantial portion of its earning to owners in the form of dividends.
EARNING POWER: $0.76 @ 1.07 billion shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
2005 | $1.40 | $1,233 M | 879 M | $1.15 |
2006 | $2.57 | $2,248 M | 874 M | $2.10 |
2007 | $2.95 | $2,562 M | 869 M | $2.39 |
2008 | ($0.10) | ($74 M) | 813 M | ($0.07) |
2009 | ($1.23) | ($1,151 M) | 935 M | ($1.08) |
2010 | $0.24 | $254 M | 1,025 M | $0.24 |
2011 | $0.55 | $611 M | 1,161 M | $0.57 |
Seven year average adjusted earnings per share is $0.76
Consider contrarian buying below $6.08 (8 times average adjusted EPS)
Alcoa (AA) is currently trading at 11.2 times average adjusted EPS. This is stock is value priced.
Consider value buying below $9.12 (12 times average adjusted EPS)
Consider speculative selling above $15.20 (20 times average adjusted EPS)
BALANCE SHEET – Stagnant. Not horrible, but not strong either. Their tangible book value per share is definitely a high point.
Book value per share: $13.22 ($14.142 B equity / 1.07 B shares)
Price to book value ratio: 0.64 (under 1.0 is good)
Tangible book value per share: $8.29 (equity – $5.271 B goodwill / 1.07 shares)
Price to tangible book value: 1.02 (near 1.0 is good)
Current ratio: 1.25 latest quarter (over 2.0 is good)
Quick ratio: 0.27 latest quarter (over 1.0 is good)
Debt to equity ratio: 0.61 (lower is better)
Percentage of total assets in plant, property, and equipment: 48.18% (the higher the better) Here are the totals for the other asset classes: Other long term assets were 19.49%, current assets were 19.37%, and intangibles were 12.95%
Working capital trend: unchanged near $1.7 billion
CONCLUSION – Alcoa’s share price bottomed on March 6th, 2009 at $5.22 per share. All of the problems present in the world economy back then are still present today. In fact, the economies of the world are even worse due to all the money printing of the central banks such as the US Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of China, and other lesser know central banks. You will get an opportunity to buy Alcoa below $5.22 per share in the next couple of years when Keynesian central bank inflation backfires.
Alcoa’s dividend record is horrible. They make big dividend cuts whenever the market takes a significant dive. Why do they do this when their dividend payout ratio is relatively low? I think the answer is the increasing bond interest expenses that Alcoa suffers from. The bond interest expense is a threat to the dividend.
Alcoa’s balance sheet is somewhat respectable for its stability.
I’d stay away from this stock because it is susceptible to the return of the worldwide recession that was papered over by the world’s central banks.
The price of aluminum will determine the fate of Alcoa’s share price. Aluminum on the spot market fell almost 60% in 2008 due to the Great Recession. The price of aluminum rose back to 2007 levels to $1.20 per pound in March 2011 following the March 2009 lows. However, the price has retreated nearly 30% since the summer of 2011 due to fears of a Chinese recession and an worsening of the European sovereign debt crisis. China will have a recession and Europe will get worse. Therefore Alcoa will suffer in the next two years.
The London Metals Exchange publishes daily warehouse inventory levels. The chart below shows the incredible buildup of aluminum inventories following the Panic of 2008. Aluminum warehouse stock buildups indicating increasing supplies. Increased supplies do not lead to increasing aluminum prices. This is bad for Alcoa.
DISCLOSURE – I don’t own Alcoa (AA).
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