A Different Way To Play ArcelorMittal

| About: ArcelorMittal (MT)

If you are on the verge of taking a position in ArcelorMittal's (NYSE:MT) stock, before you do so, consider the following way of making an investment in the company.

Rather than taking a position in the company by allocating 100% of your funds to the stock, experiment with ways to diversify across the capital structure to see if there is a less risky, less volatile way of getting the returns you hope to achieve. In an age in which income seems to be highly valued, but the fear of inflation seems to be ever-present, investing across the capital structure, especially in companies that pay a dividend, have higher beta stocks, and are leveraged to worldwide growth, can help satisfy the need for income and an inflation hedge. There are many companies that fit this description, one of which is ArcelorMittal. Let's take a look at how investors interested in allocating a portion of their portfolios to this steel and mining company might invest across its capital structure.

For example, if you plan to make a long-term, buy-and-hold type of investment in the company, consider splitting your investment between a long-term ArcelorMittal senior unsecured bond and the stock. There are many different ways to split the investment, but as an example, I would like to use the roughly two-thirds bond, one-third stock allocation I recently implemented as a means of investing in the company.

Here are details for one particular long-term ArcelorMittal bond. There are several other notes available with varying maturities, so if this one doesn't suit you, there are others that might. The March 1, 2041 maturing senior unsecured note, CUSIP 03938LAS3, with Baa3/BBB- ratings, has a 6.75% coupon and is trading at a discount to par. The bond has a make whole call, a conditional call at par for certain tax law changes, and a conditional put for a change of control.

Furthermore, the note has a structure in place whereby the coupon payment will increase 0.25% per notch downgrade, per rating agency (Moody's and S&P), should the rating fall below investment grade. The maximum the coupon is allowed to increase is 2% above the initial coupon of 6.75%. Here are two tables outlining what I just described regarding the coupon:

Moody's Rating

Total Coupon Increase







B1 or below


Click to enlarge

S&P Rating

Total Coupon Increase







B+ or below


Click to enlarge

It should also be noted that if the rating declines below investment grade but then subsequently rises back to investment grade, the coupon will return to 6.75%. In other words, once the bond's rating enters the non-investment grade realm, the coupon can fluctuate over time between 6.75% and 8.75% as its rating gets upgraded or downgraded. Also, should the note ever reach an A3 or A- rating by Moody's or S&P respectively, it will permanently cease to be subject to any of the coupon adjustments mentioned above. At this time, the note in question has yet to attain an A3 or A- rating.

With these details in mind, let's examine the amount of income an investor would receive on a yearly basis with a two-thirds bond, one-third stock allocation to ArcelorMittal. At the moment, the stock is trading at $14.65. A 325 share purchase at $14.65 per share would come to $4,761.25 (ex-commissions). In terms of the dividend, at this time, after accounting for foreign dividend tax withholding, ArcelorMittal yields 4.35%.

The bond I detailed above is currently offered at 95.346 (7.132% yield-to-maturity before commissions). The price I am quoting comes from tradeMONSTER's bond platform. If you are a tradeMONSTER client, you can purchase the bond directly through the platform. At the time this article was written, Vanguard was only showing a bid for this bond (no offers) and Fidelity was showing neither a bid nor an offer. However, if you are a Vanguard or Fidelity client and want to purchase this note, there are offers available through Bloomberg. Call the bond desk at either company and ask them to get you one of those offers.

At an offer of 95.346 and with the coupon at 6.75% (still an investment grade rating) this bond would have a current yield of 7.08% ex-commissions. Assuming a $10,000 face value investment (thereby creating the two-thirds bond, one-third stock allocation), an investor would receive $675 in annual income on the $9,534.60 investment. Of course, should the bond be downgraded, the coupon and the current yield will increase as well. For the purposes of our calculations, let's assume the lowest coupon possible on this note, 6.75%.

On a $14,295.85 investment in ArcelorMittal ($4,761.25 from the stock, $9,534.60 from the bond, ex-commissions), the total position will bring in $882.22 yearly ($207.22 from the dividend and $675 from the bond) for an annual yield of 6.17%. This yield could also go higher over time if the coupon goes higher as a result of a downgrade, the company increases its dividend, or if an investor sells covered calls on the position. While the income could decline if the company cuts or reduces its dividend, keep in mind that a dividend cut would likely result from some type of further deterioration in the business that also might lead to a downgrade of the company's bonds and hence an increase in the bond's coupon. The credit rating downgrade would then at least partially offset the hit to the dividend. Furthermore, by maintaining a one-third allocation to the stock, an investor leaves room for capital appreciation over time.

If global growth was suddenly off to the races, taking ArcelorMittal's stock with it, given the investor is starting with a 6.17% annual yield, having only a one-third allocation to the stock shouldn't prevent the investment from acting as a decent inflation hedge. On the other hand, if global growth remains weak or even declines, the 6.17% annual yield on the investment, plus any additional income from covered calls or a step-up in the bond's coupon could help to smooth out the negative returns that would result from possible further declines in the stock.

If you are interested in the strategy outlined above but would prefer a different ArcelorMittal bond, here are three other possibilities:

CUSIP 03938LAU8, maturing 3/1/2021 with a 5.50% coupon, recently offered at 97.2 (5.912% yield-to-maturity before commissions).

CUSIP 03938LAX2, maturing 2/25/2022 with a 6.25% coupon, recently offered at 100.867 (6.129% yield-to-maturity).

CUSIP 03938LAP9, maturing 10/15/2039 with a 7% coupon, recently offered at 97.817 (7.182% yield-to-maturity).

For investors interested in this strategy but who prefer to execute it on other basic materials companies, here are four other companies with dividend yields and/or bond yields at levels that would make the strategy worthwhile. Don't forget to do your due diligence on the financial profiles of these companies before taking a position in any of them.

Cliffs Natural Resources' (NYSE:CLF) current dividend yield is 4.87%. CUSIP 18683KAC5, maturing 10/1/2040 with a coupon of 6.25%, is currently yielding 5.661%.

U.S. Steel's (NYSE:X) current dividend yield is 0.88%. CUSIP 912909AD0, maturing 6/1/2037 with a coupon of 6.65%, is currently yielding 8.127%.

Alcoa's (NYSE:AA) current dividend yield is 1.41%. CUSIP 013817AK7, maturing 2/1/2037 with a coupon of 5.95%, is currently yielding 5.78%.

Newmont Mining's (NYSE:NEM) current dividend yield is 3.22%. CUSIP 651639AP1, maturing 3/15/2042 with a coupon of 4.875%, is currently yielding 5.10%. Furthermore, Newmont Mining's enhanced dividend policy allows for fluctuating dividends based on the price of gold. This means Newmont's dividend can go up or down from current levels over time. If you believe the price of gold will only go higher from today's levels over an extended period of time, there is significant upside to your yield-on-cost if you buy the stock at current levels. For instance, according to the company, a $2,500 average realized gold price would translate into a $4.70 annualized dividend. At the recent price of $43.51, this would translate into a 10.80% yield-on-cost.

Should you decide to use the strategy outlined in this article on any of the aforementioned companies, don't forget to play around with different ways of allocating your funds. For instance, there may be times when you want to be two-thirds in the stock and one-third in the bond. There are all sorts of combinations to try out, and just because you choose one for one particular company doesn't mean you need to do the same thing for a different company.

Please be aware that prices in the over-the-counter U.S. bond market may vary depending on the broker you use. I discuss this in my article, "Are You Paying Too Much For Your Bonds?" The current prices may also differ greatly from those listed at the time this article was written. For more information on any of these notes, including additional call or put features, please contact your broker or read the indenture.

Disclosure: I am long MT, NEM.

Additional disclosure: I am long CUSIPs 03938LAS3, 18683KAC5, 912909AD0, and 651639AP1. I am long gold.