Alcoa: Positive Outlook, Despite Decreasing Dividend
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The dividend decision, made by the directors of a company, involves the amount and decreasing of any cash imbursements made to the company’s shareholders. The judgment is a significant one for the company as it may affect its capital structure and stock price. Additionally, the decision may determine the amount of taxation that investors pay.
Alcoa’s Dividend Policies:
The aim of Alcoa (NYSE: AA) is to compensate common stock dividends at rates competitive with other investments of equivalent risk and in agreement with the need to reinvest earnings for long-term expansion.
Dividend Reinvestment:
Alcoa puts forward a “Dividend Reinvestment” and “Stock Purchase Plan” for investors of Alcoa common and preferred stock. The option permits shareholders to reinvest all or part of their quarterly dividends in shares of Alcoa common stock. In addition, stockholders may acquire additional shares under the plan with cash donations.
Direct Deposit of Dividends:
Shareholders may have their quarterly dividends deposited straight into their checking, savings or money market accounts at any financial institution that takes part in the “Automated Clearing House” system.
Dividend History:
Alcoa is paying dividends to shareholders on a regular basis. Let’s take a look at the previous decade. It declared a quarterly dividend of $0.125 on January 10, 2000 and maintained it through September 14, 2000.
The very next year it increased quarterly dividend to $0.15 on January 12, 2001 and maintained this dividend value for just over five years. The last dividend of the same value had been declared on September 15, 2006.
Another dividend hike came into sight on January 19, 2007 when it again increased quarterly dividend to $0.17 but the company was unable to maintain this increment for long and a sudden decrease in its quarterly dividend was recorded on March 16, 2009.
Alcoa’s quarterly dividend dropped to $0.03 and until now no dividend hike is witnessed. Thus, it has maintained a dividend value of $0.03. While the dividend has remained steady, this reduction in hike has been a result of an aluminum market oversaturated with product and price increases such as the growing US dollar.
I strongly believe with the reduction in aluminum production many companies are supporting and the strength Alcoa has in future development, this company represents a potential long term buy for investors.
Why? From Dividend Increments to Decrement:
Alcoa reported on March 16, 2009 a series of operational and financial actions to considerably enhance the firm’s cost structure and liquidity. The operational acts reduced costs by about $2.4 billion annually, decreased capital expenditures an extra $1 billion in 2010, and enhanced working capital by $800 million in the year 2009.
The firm reduced the quarterly common stock dividend as discussed earlier, saving more than $400 million yearly and launching a public offering of common stock and convertible notes intended to yield profits of about $1.1 billion.
Klaus Kleinfeld, President and CEO of Alcoa, stated that by taking fast and critical actions, the firm has been able to cope with the evolving economic crisis, the “main reason” of operational and financial changes.
He said that these actions better train Alcoa to handle through an extended downturn and prepare the firm for the future.
Kleinfeld commented on the dividend decrease, noting that, given the influence of the economy on Alcoa’s capital structure, the Board of Directors made a decision to reduce the dividend. This decision was made after evaluations to peer-companies and consideration of the interests of their stockholders. They are delighted to be able to maintain Alcoa’s record of giving a dividend each quarter for the previous 60 years.
Is a Dividend Hike Doubtful?
The Dow Jones 30 Industrials component, Alcoa, is one of the lowest-priced in the market, trading less than its book value. Although it has approximately $2 billion of liquid assets, the stock pays $0.03 per quarter in dividends. Its dividend yield is 1.15% on earnings of $610 million to trailing month. The stock’s 52 week price range was $8.45 - $18.47.
The company recently declared that it is increasing its aluminum lithium capacity at three different places all over the world to cater to rising demand from the aerospace industry for its latest patented alloys. These alloys will allow manufacturers to construct dramatically lighter, lower cost, and more fuel-efficient airplanes than is feasible with conventional materials.
Klaus Kleinfeld is predicting a 7% rise in worldwide aluminum demand during 2012, at a time when he anticipates supplies to fall due to a combination of enhancing demand and production hold backs. For value oriented, long-term investors, I believe Alcoa is worth a close look.
M&A Activities:
Alcoa and China Power Investment Corp announced on Tuesday they decided to set up a joint venture firm to make high-end fabricated aluminum products for the Chinese marketplace. Klaus Kleinfeld and CPI President Lu Qizhou inked the deal in Beijing to establish Alcoa CPI (China) Aluminum Investment Co. Limited, which will be majorly held and supervised by the US aluminum producer and based in Shanghai. Kleinfeld also stated that this agreement will improve Alcoa’s competitiveness and further positions their businesses for sustained profitable expansion.
The companies stated that the joint venture firm will serve as a top manufacturer of high-end fabricated aluminum products for the aerospace, automotive, commercial transportation, consumer electronics and packaging markets in China.
Aluminum Corporation of China Limited (NYSE: ACH) is one of Alcoa’s main competitors. Because China lacks the resources and energy sources used to produce aluminum, ACH operates in a high cost environment. Despite this, ACH has kept its costs low compared to its nearly 100 competitors within the country, due primarily to its size and distribution channels. I believe ACH will be harder hit in the coming years, compared to Alcoa, which has the worldwide reach to better weather any economic downturns that could negatively impact aluminum demand. Therefore, I will take a cautious 'wait and see' approach to ACH for now.
Similar results in the aluminum market can be seen with another metals competitor Rio Tinto (NYSE: RIO). The bullish market of aluminum stocks has many companies cutting back as seen with Rio. This company has already cut aluminum production by close to 12% and is considering the elimination of its US Aluminum unit. This can be a plus for Alcoa since it could benefit in US markets with a reduction in Rio influence.
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