We’ve written about Roger Conrad’s Big Yield Hunting several times in the year or so that he’s been publishing it, and folks are usually pretty interested — Conrad also runs the more conservative Canadian Edge, Australian Edge and Utility Forecaster newsletters, but for his Big Yield Hunting letter he tends to recommend very high yielding stocks that are a bit on the riskier side. And if you want to get your typical Stock Gumshoe reader excited, all you have to do is dangle a 12% dividend in front of his nose.
The stock Conrad is teasing today is apparently a bit beaten down, and in a tough industry — but he says he thinks the stock can recover and it has plenty of cash to fund its dividend, which is what many folks who seek high yielders are really worried about. So who is it? Let’s sift through Conrad’s clues, shall we?
“We’re hunting deep in the yield jungle for our prey. It’s well-hidden and overlooked even by the most experienced hunters.
“But we’ve been tracking this “yieldabeast” for a while now. We finally have it lined up in our sights and we’re ready to bag it, stuff it and hang it on the wall.
“This month’s pick is a scrawny beast—you can buy it for about $1.35 a share.
“But it unloads a 9.5% yield. That’s a big yield! And that’s why we’re hunting this deep in the jungle….
“I admit it’s not a pretty story. And in the spirit of full disclosure, I should tell you that this 50-year-old company is trading at its all-time low!
“In 2006, it was trading at $12.47. It’s lost about 90% of its share price. But on the bright side, all the bad news about this company is already baked into the price.
“I have one word that tells you all you need to know about its unfortunate price slide: construction!
“This yieldabeast is a pure play building products and aluminum producer. But with the global slowdown in construction, it’s taken a heavy hit.
“And its exposure to aluminum isn’t helping the share price either. Aluminum has been in a steady slide in 2012, from a high of $2,353 per metric ton to a recent low of $1,845. This company’s share drop has been in lockstep with aluminum’s slide.
“But even at a price of about $1.35, I’m not recommending you throw away your money.
“We may be deep in the yield jungle, but I still believe that this underlying company is strong and can maintain its dividend.
“This has the potential to be a turnaround story, and my 12-month estimate is for a 20% rise in share price. Meanwhile, you’re bagging that hefty 9.5% yield.”
So there’s clearly some hair on this one — you don’t usually see 50-year old companies trading for a buck a share in the US unless they’ve really, really disappointed investors. Some more clues?
Conrad says they have no debt, they have increased the dividend by 32% … ring a bell for anyone? No? Well, it turns out this isn’t actually a US company, which makes the low per-share price less noteworthy (not every country looks down on low-priced stocks as US investors tend to) … Roger must have run across it in searching out ideas for Australian Edge, because this is the Aussie building products company CSR. This is a bit tricky, because there are a lot of companies named CSR, so if you decide you’re interested be careful — this is NOT CSR Corp. the Chinese train builder that trades in Hong Kong, or the British semiconductor company CSR that trades on the Nasdaq — This CSR trades in Australia at CSR, and at CSRLF on the pink sheets. Last price was A$1.45 in Australia, and US$1.47 on the pink sheets, which is close to being fair (A$1.45 is actually about US$1.51, but the pink sheets trading is extremely illiquid so the price can jump by five or ten cents even if the underlying “real” stock in Australia doesn’t move — all it takes is one person who really, really needs to buy or sell in a hurry on the pinks to send the price out of wack).
CSR is indeed a building products company, and the yield is right around 9% even with the price having jumped slightly since Conrad’s teaser text was written — the trailing yield for the past twelve months was 13 cents per share, though that number is neither written in stone nor guaranteed to rise every year (it did rise last year). CSR, like many building companies, is heavily influenced by new housing demand around the world, particularly in places like the US, Australia and Europe where housing booms and busts have led to many management challenges. They make stuff like insulation, paving stones, cement board, ventilation systems, etc.
And yes, they do also have a toe in the aluminum business — they own a piece of a smelter, though it looks like it’s somewhat “arms length”. That ownership is through a partially owned subsidiary, but in effect they own about 20% of the second largest aluminum smelter in Australia. Not anything to make folks smile particularly much in these days of low aluminum prices (or aluminium, since we’re talking Australia), but it is an asset and a low-cost operation, and it did generate almost as much revenue as their building products division last year. As with some of their other products that are traded internationally, the strong Aussie dollar has hurt relative performance for the aluminium division (having a weak currency helps exports, having a strong one hurts them … all else being equal).
The company reported in their last release that they own A$2.32 in “net tangible assets per share” as of March 31, a lot of which is plants and equipment as well as property they own in their property division, which holds some housing development acreage and other developable or developed land … and they also seem to have enough cash on hand to fund their operations as long as they don’t have big capital investment needs this year (they say they don’t), along with a perfectly decent credit rating should they need to borrow. They say that they intend to keep the dividend at 60-80% of earnings “before items”, and given what they’re saying about weak aluminum prices and continuing weak housing starts in Australia, it seems optimistic to expect that dividend to go up this year … they do have almost enough cash to cover the dividend for the year even if they’re unprofitable, but in a challenging business where dividend levels have not been promised I’d be surprised if they used up all their cash to cover shareholder payouts. It’s tough to guess what might happen to the building products division since we don’t know when Aussie building starts might recover, but it’s worth noting that lots of other Aluminum/Aluminium stocks trade at a steep discount to book value as well — Alcoa (AA) trades at around 70% of book value, and Century Aluminum (CENX) is around half of book value … doesn’t mean they’re not possibly bargains if you think aluminum demand and pricing will snap back in the next couple years (I left my crystal ball in my other pants, but haven’t heard any optimism about aluminum for a long time), but it does mean that we shouldn’t assume CRS will snap back to trade closer to their net asset value. The shares bottomed out quite recently around A$1.20, and bounced back a little bit but is still down close to 40% on the year.
I haven’t looked at CSR particularly closely — it’s certainly worth checking out that last annual report if you’re curious about them, and perusing their website. The stock trades at about ten times last year’s earnings, but analysts are expecting earnings to fall so it’s more like 16X next year’s earnings, according to the Bloomberg estimates. It’s a fairly small company but certainly not teensy, the market cap is right around $750 million.
There are other pretty high-yielding stocks in similar businesses — Australian company Alumina (AWC), for example, is more of a pure play aluminum stock and yields about 7.5%, which is also about the annual yield you’d receive from the junk bonds issued by Century Aluminum that mature in two years (that’s the bond with CUSIP number 156431AH1, just FYI — definitely not recommending it, I just noticed the relatively high coupon the other day … and yes, Century is rated significantly riskier than market leader Alcoa, which would offer more like a 3% yield on similar maturity bonds), so there are other ways to also book fairly high income if you think aluminum prices will allow these companies to remain in business. Do keep in mind that although the housing market in Australia has not had the complete bust that we had in the US, there are plenty of pundits who expect the current slowdown in Aussie housing to turn into a bust — I don’t know if that will happen or not, much of the Aussie economy depends on strong commodity prices so that will play a role, but they also certainly have a lot more that they can do to stimulate their economy should they want to go the way of the US and EU (their interest rates are relatively high and offer a lot of room for cutting if they choose, some folks think they should offer more stimulus to boost the domestic economy and housing, etc.).
As I said, no crystal ball here but clearly betting on either aluminum prices or Australian housing starts is likely to be a volatile bet — the dividend for CSR should remain decent, and I’m sure Roger Conrad and his gang have done a lot more work analyzing the sustainability of the payout, but I don’t know if it will stay up here in the rarefied air of a near-10% yield. Still, it’s your money — what do you think? Let us know with a comment below.
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