Friday, October 02, 2015

Dividend Worth Holding for Better Times

The last post profiled a strong dividend paying stock in the renewable energy sector.  Dividends can be an investor’s ‘sea sick pill’ when volatility become excessive.   The volatility measure for the S&P 500 Index (VIX) spiked to a peak of 53.29 during trading on August 24, 2015.  While things have calmed down since, volatility remains well above the 20.00 level where many investors consider it too precarious to take new equity positions. 

Methanex Corporation (MEOH:  Nasdaq) is the largest aggregator and distributor of methanol or wood alcohol.  At the current price level MEOH provides a dividend yield of 3.2%.  A price earnings ratio of 11.6 times trailing earnings makes the stock look even more interesting.

Sales have been consistently growing for Methanex and earnings have followed.  In the twelve months ending June 2015, the company earned$298 million in net income on $2.7 billion in total sales.  The company is exposed to the natural gas market and methanol pricing has been weak.  Despite the fact that Methanex has reported lower-than-expected earnings in each of the last three quarters, there appears to be considerable optimism for performance in 2016.  The company is relocating methanol plants from Chile to Louisiana in the U.S.  These actions along with increased production in New Zealand and Canada will lead to greater capacity and improved economics.    

Dividend hungry investors might be more interested in operating cash flows.  Methanex has managed to convert 20.5% of sales to operating cash flow over the last three years.  Capacity expansion may contribute to an even higher sales-to-cash conversion rate.  With a large plant requirement the company has a hefty capital expenditure budget.  Yet in each of the last three years Methanex has reported positive free cash flow, providing a strong signal that it is strong enough to support a generous dividend payout.

Shares of Methanex have been on a downward slide since late June 2015, reflecting the fate of nearly all stocks in the U.S. equity market.  The shares now look egregiously oversold, at least from a technical standpoint.  Unfortunately, money flows into the stock have been fitful and the stock does not seem to have the support to turn back upward.  Yet with a dividend of $1.10 per share, the stock might be worth holding until better times come around.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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