“High Yield: Trader’s Dream Stock Set to Soar Again”

by Travis Johnson, Stock Gumshoe | September 5, 2007 4:06 am

This one comes in from Mark Skousen, who we hear teasing new ideas with some regularity, but this particular ad is for his high-income alert[1], which I haven’t seem an ad for prior to now. I have heard him talking quite a bit about dividends[2] of late, whenever he gives a talk or is quoted for an article that crosses my view, and he generally seems to have become a bit of a dividend convert after reading “The Future for Investors” by Jeremy Siegel.

That’s the book, for those who haven’t had the pleasure, that went back and analyzed historical stock returns and told us, among other things, that you would have been much better off with the original companies in the S&P 500 for the past 50 years instead of the real index, because the index kept changing to incorporate the hot new technologies and companies of each era. The old economy, tried and true companies that paid consistent dividends trounced the new ones.

But that’s neither here nor there — just the Gumshoe taking this opportunity to spread some wisdom. Though Siegel does a pretty good job of that himself, you have to try pretty hard not to run into him if you spend any time perusing the financial press.

We’ve got a teaser to work on here, people. Let’s focus!

So Skousen’s got a stock that he says he has profitably recommended to his readers as a trade several times in the past — and this High Income service he runs does a fair amount of trading, I gather. That kind of thing would wear me out, I’d tend to think that if you’ve got a good high dividend stock you might as well just hold onto it … but apparently this works well for him.

And why would you care what I think, anyway? Again with the focus.

So this one is a commodity company of some sort. Skousen says it has “nearly guaranteed profit potential,” and that “THIS RED-HOT COMMODITY PRODUCER IS ON THE
VERGE OF ANOTHER COMEBACK.”

Sorry, I use the all caps only for verisimilitude … not my idea.

So, how about some clues for this commodity company?

“Despite doubling in price in the past year, this company is still selling at a bargain at only 12 times earnings.”

Sales were up 43% last year, to 6.25 billion bucks. Earnings were up 65% to 2.45 billion.

“And the icing on the cake… this company is one of a select few commodity companies that pays a dividend. Their shares are currently offering a generous 6.2% dividend yield paying out
almost $5 per share this year already!”

So what is this “trader’s dream stock” that Mark Skousen[3], PhD, urges us to buy … after, of course, signing up for a subscription to his High-Income Alert? The subscription will run you $995 at the current sale price, by the way.

Well, I do appreciate the specific financial clues, indeed I do, because along with the old overheating analog chip in my Thinkolator 4000, they allow the Gumshoe to confirm for you that this company is …

Southern Copper (PCU).

You’ve probably heard of this one before — they’re pretty big. They were formerly called Southern Peru[4] Copper (thus the “P” in front of the “CU”), and, perhaps coincidentally, they changed their name just about when the leftist campaign looked like it might turn Peru into Venezuela South, and populism seemed like it might take hold in the Inca heartland. That was a couple years ago, and the leftists actually lost the pivotal presidential election fairly handily, so that’s not a current issue for PCU that I’m aware of (though tides turn).

They do have significant mining operations in Mexico[5], too, though their two big mines in Peru produce well over half of their product. They are among the biggies — one of the top ten or so miners in the world in terms of volume and revenue, and the largest one that’s focused primarily on Copper.

And yes, it’s true, they do pay a big dividend — dividends aren’t all that rare among the big miners, but none of them pay a really significant one like Southern Copper does, just over 6% at the moment.

I don’t know a lot else about this company — if you like the long term story for copper[6], it would be hard to argue against PCU being worth a look, just due to their size, relatively reasonable PE ratio, and nice solid dividend. If you compare them to, say, a big gold[7] miner like Newmont, their PE ratio is much lower but Price/sales is a bit higher. PCU looks pretty similarly valued to Freeport McMoran, the other big copper name out there after their Phelps Dodge acquisition (PCU is a little smaller bit more expensive on most of the metrics, but the acquisition-related FCX debt and the PCU dividend makes it look a skooch nicer). Just about all the miners these days are awash in cash flow and have nary a scrap of debt, so that’s always nice.

Some unanswered questions for me: I don’t know what the projected life of their big mines is, so that would clearly be a helpful fact to make yourself familiar with in judging their long-term prospects; and I don’t know how they sell — whether their production is already sold off for the next few years, or they’re more levered to any abrupt changes in the price of copper, either good or bad changes. I’m willing to buy the argument that demand for copper will continue to be quite strong for decades to come.

Oh, and just to note that there are clearly several folks who remember how cheap mining companies used to be: Morningstar[8] puts the fair value for Southern Copper at $36. Oh, wait, that sounds more shocking if I first tell you that the shares closed on the NYSE today at $108. So clearly it’s not ALL strawberries and cream, some folks are still worried about higher royalties/taxes in Peru and about the possible significant decline in copper prices.

Too good to be true? Or worth a few bucks of your hard earned money? Your call — let us know what you think.

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