I had written recently on Freeport-McMoRan (FCX, Financial), a stock that I track closely, and I was of the opinion that the company will navigate the crisis. I maintain that view and I am certainly bullish on the stock with a 5-year time horizon in terms of strong returns. However, Freeport-McMoRan will continue to disappoint in the near-term, and today the company made another announcement that will seem negative for the near-term, but is certainly the right step for the long-term.
Freeport-McMoRan announced a quarterly dividend of $0.05 per share and this is the near-term negative as the company has reduced dividends from an earlier $0.3125 per share to current levels. Freeport-McMoRan had an annual dividend of $1.25 per share and a dividend yield of 6.8% at current stock price.
This will now reduce to an annual dividend of $0.2 per share and a low dividend yield of 1.1%. For investors who were exposed to the stock considering a dividend yield in excess of 5%, this is a setback for the near-term. However, the positive side is that the company can conserve its operating cash flows and deploy the cash conserved in capital expenditure or debt reduction plans. That is the priority at this point of time.
Considering the company’s shareholder value creation record in good times, I can say with conviction that once natural resource prices recover, Freeport-McMoRan will trend higher and the company’s dividend will also surge higher. For now, the correction due to slashing of dividends is yet another good opportunity to accumulate the stock.
From a cash conservation perspective, Freeport-McMoRan paid a cash dividend of $1.3 billion to common stock holders as of FY14. The dividend will reduce to roughly around $200 million in the current year, resulting in cash savings of almost $1 billion. With the company having a capital expenditure plan of $6 billion for 2015 and the company expecting operating cash flow of $4 billion for the year, a gap of $2 billion still needs to be filled. I believe that this will come through divestment of stakes in the oil and gas assets. If the company does not get the desired valuations, a cut in capital expenditure is the likely option than increase in leverage.
Therefore, the cut in dividend or suspension of dividends was critical and it has come at the right time for Freeport-McMoRan. The stock is likely to react negatively for a few trading sessions, but I believe that the market will see more positives in this development than negatives.
In conclusion, I maintain my long-term positive view on Freeport-McMoRan and the cut in dividends does not change my outlook in anyway. On the contrary, I believe that it is a positive step and will help the company strengthen its balance sheet.
