This is my first article on Seeking Alpha, after spending some time as a reader/commenter. While thinking about the topic for my first article, I decided on presenting my own dilemma and the thought process I used/am using for making a final call on whether Freeport McMoRan (FCX) or Southern Copper (SCCO) is a better long term buy for me personally.
I own shares of these two copper giants - Freeport-McMoRan Copper & Gold and Southern Copper. Based in Phoenix, Arizona, Freeport is the world's largest publicly traded copper producer. Southern Copper of Peru produces copper, molybdenum, zinc, and lead amongst others. While both might seem to be dealing with more than just copper, there is no denying that copper is the bread and butter of both companies.
I will present the pros and cons of both the companies, along with my decision and why I made that decision. I have tried my best not to cover the same point in two places - example: saying yield is Southern Copper's strength and Freeport's weakness at the same time is a repetition.
Pros of Freeport:
a. Lower Valuation: Its current P/E is 7.22, while SCCO trades at a higher premium of 11.96.
b. Balance Sheet: Healthier balance sheet in terms of free cash flow and debt. Since the 2008 crisis, it has done very well to reduce its debt using its free cash flow and also maintained a steady but smaller dividend payment.
c. Grasberg: It holds the world's largest copper reserve in Grasberg, Indonesia.
Cons of Freeport:
a. Frequent labor strikes: The management really doesn't seem too keen on settling the disputes as and when they start off or perhaps in even making sure there are no conflicts in the first place. This is not to say Southern Copper has not or will not have labor problems but at the moment, Freeport seems to have its hands full dealing with one strike after the other.
b. More Volatile: This might tie up to the dividend factor but FCX's stock price has been more volatile than that of SCCO historically. FCX lost about 4/5th of its value during the 2008 crisis while SCCO was more stable.
Pros of Southern Copper:
a. Higher dividend yield: With copper demand heavily dependent on China, a bad manufacturing report out of China or any reports of China hard landing will certainly impact Copper prices. So, if and when the copper prices fall, SCCO's higher yield will accumulate more shares through dividend reinvestment. An often overlooked but powerful component in long term investing is the power of compounding.
b. Higher Growth: Southern Copper has managed to post impressive growth rates compared to Freeport. Its recent quarterly earning growth was more than 80%.
Cons of Southern Copper:
a. Restricted Stock: 81% of the stock is held by insiders. While this might seem like a positive that insiders would do their best to push the stock price up, I see it as a negative because it restricts the available shares for the public. Combine that with the new Peru government and all the talks about mines being nationalized and taxes increasing, you have a perfect stock to scare away the average investor.
b. High Payout ratio: Based on its most recent EPS of 2.7 and dividend of $2.80/share, its payout ratio is above 100. That’s clearly not sustainable but history shows it has paid out substantial dividends for all but one quarter (May 2009) over the last 7 years at least.
My decision: I have already sold off half my holdings in FCX. The higher yield at the moment is tilting my scales in favor of SCCO. I am in my 20s and believe I could afford to take "calculated" risks with my investments. However, this may not make sense for everyone. The higher debt and payout ratio of SCCO might tilt the tide in favor of FCX for many conservative investors, which I would love to hear in the comments section.
Thanks for reading. Please feel free to leave your comments/criticism/feedback below.
Additional disclosure: I have sold off half my FCX holdings. I will be selling the other half after their next earnings report. I am long SCCO.