South32’s Aluminum Assets After The BHP Billiton Spinoff

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.

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The South32 Component Of The BHP Billiton Spinoff

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.

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Southern Company Stock In A Dividend Portfolio

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).

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