Today, I saw the wire come through announcing that Campbell Soup will pay a $0.312 quarterly dividend. If someone were to buy shares of Campbell Soup today, he would get a yield of 2.75%. This is the kind of company that is useful if you want to inventory wealth and modestly improve your purchasing power over time, but it is much less useful if your goal is to build wealth. This may not be immediately obvious if you study Campbell Soup’s long-term history of delivering 10.5% dating back to 1985. It appears to be roughly equal to what you would get by investing through an S&P 500 Index Fund.
Almost 29% of South32 revenue after the presumptive BHP Billiton will consist of Australian aluminum mining assets. Along with company’s silver/zinc division, aluminum will be the largest singular driver of investor returns. If you have been reading me for a while, you may wonder why I would have any kind of interest in this type of business at all, given my sharp disdain for Alcoa’s business model that I have covered in years past.
The summary of my writings on Alcoa previously have been something like this: Alcoa tends to be a troublesome cyclical to attach a buy-and-hold attitude towards because the (1) prices of aluminum is highly volatile and (2) the costs of running the business are quite high. In other words, Alcoa investors are likely to see higher fluctuations in stock price and lower stock market gains than someone investing in an S&P 500 Index Fund, accepting higher fluctuations in profit for lower long-term returns because the good times of high prices in the American aluminum industry have not offset the high costs of ordinary and bad times when the price of aluminum is low.
I’ve been studying BHP Billiton non-stop the past week or two because the company seems to offer one of the better dividend opportunities in the market today. BHP Billiton has returned almost 13% since 1987 (I’m tracing the company back to its Australian, rather than British, origins when I calculate that because I cannot find data on the British side prior to the June 2001 merger of BHP and Billiton). What has caught my attention is this: The price of BHP Billiton has come down quite a lot, from the $70s to the $40s despite the fact that profits are expected to decline from only $13.8 billion to $13.5 billion. Despite all the negative attention about commodity prices, this is still expected to be the 4th or 5th most profitable year in the company’s history.
In January, the price of Southern Company stock was $53 per share, perhaps giving people some pause that the price of the Southeastern electric giant was drifting towards expensive territory. In January, the P/E ratio of Southern was 24, which is moderately concerning because this is company that has a long history of trading around 16x earnings for investors. This does not mean that Southern investors should have contemplated selling—after all, the company has compounded wealth at 15% annually since 1981 and you still got to collect 4% of the market price as a dividend, but it was the kind of price that should make you feel hesitant about making a large, substantial cash purchase in new shares (particularly if you care about how your stock performs compared to the S&P 500 in general over the next five years).
I’ve been conversing with the investor relations department at BHP Billiton trying to figure out the terms of the South32 spinoff of BHP Billiton for American shareholders that own American Depository Shares (ADSs). As an aside, the name South32 is because BHP Billiton will be spinning off assets that are located in both Australia and South Africa, and they both share the geographic 32nd South parallel line of latitude.
Although the regular shares that trade in Britain will be spun off with a 1:1 ratio, each owner of an ADS share in BHP Billiton will receive 0.4 shares of South 32. If you own, say, 100 shares of BBL and the demerger gets approved, you will have 100 shares of BHP Billiton paying you $248 in immediate annual dividend income (because the management indicated that the dividend won’t be debased to a lower amount to reflect the South32 spinoff) and you will also have 40 shares of the new South32 after the spinoff.