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Southern Copper Corp (NYSE:SCCO) is one of the largest integrated copper producers in the world. We produce copper, molybdenum, zinc, lead, coal and silver. All of our mining, smelting and refining facilities are located in Peru and Mexico and we conduct exploration activities in those countries and Chile. Since 1996, our common stock is listed on both the New York and Lima Stock Exchanges.

Reasons to be bullish on Southern Copper

  • A good five-year dividend average of 6.2%
  • A strong three-year dividend growth rate of 83%
  • At 92% the payout ratio is rather high, but the operating cash flow is more than enough to cover dividend payments.
  • A very strong interest coverage ratio of 19.38
  • A strong levered free cash flow of $1.3 billion
  • It has a free cash flow yield of 6.22%
  • It also sports a revenue growth rate of 11.36%
  • Net income has been trending upwards nicely over the past three years; it has surged from $929 million in 2009 to $2.34 billion in 2011.
  • Cash flow per share has increased steadily over the past few years; from $1.05 in 2009 to $2.19 in 2011.
  • A five-year payout ratio of 87%
  • It has an excellent current ratio of 3.23 and an even better quick ratio of 2.55.
  • As it sports a fairly high beta, it's a good candidate for covered writes. Covered writes enable investors to open a second stream of income. If applied properly one can generate more money using this technique than from the dividends paid out; this is especially true for high beta stocks.
  • A very strong three-year total return of 141%
  • Net income and operating cash flow has been increasing for the past three years.
  • Dividend 5 year average 6.06
  • Five years ROE average of 43.71
  • ROI 12/2011 = 34.5
  • A lot of noise has been made about the recent dividend cut from 70 cents to 19 cents. What many have failed to pay attention to is that future dividends will also include a share component. 0.0107 shares to be precise. If this is factored in the payment comes to roughly 54 cents a share, which translates into a yield of roughly 6.7% and not the 2% so many sites are erroneously posting. We like the fact that part of the dividend is going to be paid in shares. Going forward this could really add as the new shares you received will also pay out dividends in the future (sort of like a mini drip program).
  • Finally, 100K invested for 10 years would have grown into a stunning $2.13 million.

This article will cover a lot of key ratios, and investors would be best served if they got a handle some of the more important ones.

Free cash flow yield is obtained by dividing free cash flow per share by the current price of each share. Generally lower ratios are associated with an unattractive investment and vice versa. Free cash flow takes into account capital expenditures and other ongoing costs associated with the day to day to functions of the business. In our view free cash flow yield is a better valuation metric then earnings yield because of the above factor

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring. If your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest: Magellan Midstream Partners LP: Wait For A Pullback

Debt to Equity Ratio is found by dividing the company's total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A debt to equity ratio of 0.5 tells us that the company is using 50 cents of liabilities in addition to each $1 of shareholders equity in the business. There is no fixed ideal number as it depends on the industry the company is in. However, in general a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.

Price to cash flow ratio is obtained by dividing the share price by cash flow per share. It is a measure of the market's expectations of a company's future financial health. The effects of depreciation and other non cash factors are removed, and this makes it easier for investors to assess foreign companies in the same industry. This ratio also provides a measure of relative value like the price to earning's ratio.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa; lower ratios are generally more attractive. If a company generated 400 million in cash flow and then spent 100 million on capital expenditure, then its free flow is $300 million. If the share price is 100 and the free cash flow per share are $5, then company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry; this gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example, if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to

Quick ratio or acid test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities. Additional key metrics are addressed in this article: 5 Super Dividend Aristocrats

Southern Copper Corp

Industry: Non-Precious Metals

It has a free cash flow rate of $1.33B and a current ratio of 3.23 and an interest coverage ratio of 19.38

Performance

Qtrly Earnings Growth = 9.1%

Qtrly Revenue Growth = 11.4%

Total return for the past 3 years = 175.29%

Total return for the past 5 years = 76.01%

Total return for the past 12 months = -17.2%

Consecutive dividend increases = 0 years

Growth

Net income for the past three years

Net Income - 2011 = $929 million

Net Income - 2010 = $1554 million

Net Income - 2009 = $2344 million

EBITDA ($mil) 12/2011 = $N/A

EBITDA ($mil) 12/2010 = $2915

EBITDA ($mil) 12/2009 = $1825

Sales ($mil) 12/2011 = $3193

Sales ($mil) 12/2010 = $5150

Sales ($mil) 12/2009 = $3734

Dividend Sustainability

Total cash flow from operating activities

2008 = $1.73 billion

2009 = $963.18 million

2010 = $1.93 billion

Payout Ratio 12/2011 = 101%

Payout Ratio 5 Yr Avg 12/2011 = 87%

Change in Payout Ratio = 14%

Other Key Important Ratios

Price to Sales = 4.11

Price to Book = 6.94

Price to Tangible Book = 7.17

Price to Cash Flow = 10.68

Price to Free Cash Flow = -42.2

Quick Ratio = 2.55

Current Ratio = 3.23

LT Debt to Equity = 0.68

Total Debt to Equity = 0.68

Interest Coverage = 19.38

Inventory Turnover = 4.4

Asset Turnover = 0.85

Dividend yield 5 year average = 6.06

Dividend rate = $ 2.07

Dividend growth rate 3 year avg = 31.45%

Dividend growth rate 5 year avg = 1.05

Consecutive dividend increases = 0 years

Paying dividends since = 1996

Total return last 3 years = 175.29%

Total return last 5 years = 76.01%

Related companies (Peer group analysis)

Aluminum Corp of China Ltd. (NYSE:ACH)

Industry: Non-Precious Metals

It has a free cash flow rate of $-2.30B and a current ratio of 0.82 and an interest coverage ratio of N/A

Net income for the past three years

Net Income - 2011 = $-686 million

Net Income - 2010 = $143 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2008 = $460.05 million

2009 = $-103.41 million

2010 = $1.08 billion

Dividend yield 5 year average = 1.43

Dividend rate = $ 0.07

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = -55.92

Consecutive dividend increases = 0 years

Paying dividends since = 2002

Total return last 3 years = 18.41%

Total return last 5 years = -36.64%

Freeport-McMoRan Copper & Gold (NYSE:FCX)

Industry: Non-Precious Metals

It has a free cash flow rate of $4.27B and a current ratio of 3.42 and an interest coverage ratio of 21.21

Net income for the past three years

Net Income - 2011 = $2749 million

Net Income - 2010 = $4336 million

Net Income - 2009 = $4560 million

Total cash flow from operating activities

2008 = $3.37 billion

2009 = $4.4 billion

2010 = $6.28 billion

Dividend yield 5 year average = 1.51

Dividend rate = $ 1.00

Dividend growth rate 3 year avg = 448.08%

Dividend growth rate 5 year avg = 3.4

Consecutive dividend increases = 1 years

Paying dividends since = 1994

Total return last 3 years = 204.8%

Total return last 5 years = 66.3%

Alcoa, Inc. (NYSE:AA)

Industry: Non-Precious Metals

It has a free cash flow rate of $1.02B and a current ratio of 1.28 and an interest coverage ratio of 3.24

Net income for the past three years

Net Income - 2011 = $-1151 million

Net Income - 2010 = $254 million

Net Income - 2009 = $611 million

Total cash flow from operating activities

2009 = $1.37 billion

2010 = $2.27 billion

2011 = $2.2 billion

Dividend yield 5 year average = 2.1

Dividend rate = $ 0.12

Dividend growth rate 3 year avg = -27.45%

Dividend growth rate 5 year avg = -40.34

Consecutive dividend increases = 0 years

Paying dividends since = 1939

Total return last 3 years = 72.23%

Total return last 5 years = -63.81%

Thompson Creek Metals Co., Inc (NYSE:TC)

Industry: Non-Precious Metals

It has a free cash flow rate of $-263.45M and a current ratio of 3.17 and an interest coverage ratio of 34.33

Net income for the past three years

Net Income - 2011 = $-56 million

Net Income - 2010 = $114 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2008 = $417.6 million

2009 = $105.9 million

2010 = $157.4 million

Dividend yield 5 year average = 0

Dividend rate = $ 0.00

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 0 years

Paying dividends since = None

Total return last 3 years = 136.66%

Total return last 5 years = -2.52%

Conclusion

The markets are extremely overbought, and long-term investors would be wise to wait for a pullback before deploying fresh money into stocks.

Sources: Free cash flow yield, and revenue growth charts sourced from Ycharts. EPS, EPS surprise, broker recommendations and price and consensus charts sourced from zacks.com. Earnings estimates and growth rate charts for SCCO sourced from dailyfinance.com.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: Is Southern Copper Still A Good Long-Term Dividend Play?