IAMGOLD (IAG) is definitely the worst performer stock in my portfolio and things got worse on Wednesday when the company announced that it would suspend its dividend until further notice, following several other gold miners who took a similar route. The company had a dividend yield around 5% prior to the cancellation of the dividend, which means it was able to attract some dividend investors who are probably offloading their shares as I'm writing this article.
Is dividend suspension always a bad thing?
IAMGOLD reminds me of Nokia (NOK) of last year. Prior to last year, Nokia had a history of strong dividends and the company had a yield of 6%. Last year, the company suspended its dividends and this resulted in a sell-off even though I viewed the dividend cut as a positive thing. Sometimes, when a company is having tough times, it should put the dividends in the back seat and focus on getting back to sustainable profitability because this will result in better consequences for the investors than getting a dividend check that might be eating into a company's tiny profits. Many times shareholders forget what it means to own shares of a company, that is, actually owning parts and pieces of a company. It's always in your interest if a company you own (even if you own a tiny bit of the company) to be profitable. Cutting dividends will save IAG about $100 million a year, which is an amount the company could use in its operations or growth.
Gold is all speculative
Just like every gold miner in the world, the success of IAMGOLD is highly dependent on gold prices. The higher gold prices get, the more profitable the company will be. The price of gold is all speculative so we don't really know where it will be headed next. Many times, people tried to come up with formulas or algorithms in order to predict gold's price movements but no one has ever been successful so far. I've yet to see a model that can successfully predict gold's price.
Many times gold's price movements are linked to the liquidity in the market but the last few years showed that there is limited, if any, relationship between liquidity and gold prices. In 2011 when there was limited liquidity, the gold prices soared; this year when there is plenty of liquidity and unlimited money-printing across the world, gold prices plunged. Gold prices can go up or down based on any reason or no reason.
When it comes to predicting a company's stock price, we can use many tools such as past earnings, future earnings estimates, book value, dividend yield, technical indicators, revenue growth, management, past performance and other tools with at least partial success. When it comes to commodities, we can usually look at the demand trends by looking at certain aspects. For example, if car and plane industries are picking up, we can see higher demand for oil and aluminum. As much as gold comes, we can't really make these predictions because gold has no earnings, no book value, no dividends and very limited industrial usage.
Does that mean investors should completely ignore gold? Absolutely not. It doesn't hurt to devote a tiny percentage of one's portfolio in gold. While some people directly buy gold or gold ETFs, I choose to invest in gold miners like IAMGOLD.
IAMGOLD's current valuation
Currently IAMGOLD's market cap is $1.3 billion. In the last 4 quarters, the company generated $1.37 billion in revenues, $290 million in operating income and $93 million in net income. This gives the company a price to revenue ratio of slightly less than 1, price to operating income ratio of 4.48 and a price to earnings ratio of 13. The company's balance sheet has $466 million in cash and short term investments, $65 million in finished goods (i.e., gold) and long term investments of $181 million. Combining these values gives the company $712 million in highly liquid assets. Excluding this from IAMGOLD's market cap would give us a P/E ratio of 6.
Just as importantly, IAMGOLD has $5.16 billion in total assets, $1.49 billion in total liabilities and $3.67 billion in total equity. Basically, IAMGOLD's book value is more than twice as much as its market cap; in other words, the company trades for a discount of more than 50% to its book value. Furthermore, the company's price to tangible book value ratio is as low as 0.4. As long as gold prices don't crash to three digits, IAMGOLD poses a great value for investors with a long-term mindset who like investing in turnaround stories.
Many times you'll hear people say things like "I wish I bought Ford when it was below $2" or "I wish I was brave enough to buy Bank of America at $4.97" or "I don't know why I didn't buy Nokia when it fell to less than $3." People will always talk about turnaround stories after the fact but there are always similar opportunities in the market. IAMGOLD is currently going through hard times but it has very little to do with how the company is being run. Most of the company's troubles come from outside factors (i.e., instable gold prices in the short-to-medium term). I am a big fan of turnaround stories, and I love them even more when the company's troubles aren't a company's own fault. IAMGOLD's management has a conservative viewpoint and they are doing everything they can to preserve the company's cash as well as its book value. When companies are in trouble, they can trade for values below their book value but when things improve, they rarely stay there.
While gold prices will continue to be instable for the time being, IAMGOLD is a good way to expose your portfolio to some gold, especially at the current cheap price. In a market that's pumped by infinite money printing, IAMGOLD may be one of the few value plays left.
Since IAMGOLD is highly volatile, you can create your own dividends by selling covered calls against your shares. In a typical month, you can generate a yield of 2-3% if you sell your calls at-the-money or with a strike price that's really close to the current price.