Alcoa Declares Dividend It Cannot Afford

Oct. 8.12 | About: Alcoa, Inc. (AA)

The board of directors of Alcoa (NYSE:AA) declared a quarterly common stock dividend of 3 cents per share, payable Nov. 25, 2012, to shareholders of record at the close of business on Nov. 2, 2012. Current estimates are somewhere around 1 cent per share in earnings.

That’s negative cash flow. Business schools tell you that’s a big no-no.

When the estimate is just a penny a share, you know it’s on a knife’s edge and any little burp can tip it into the red. Aluminium is a global commodity, and the globe isn't looking so good. Alcoa has cut costs, but it can only go so far. It has some cash and it hsa a very serious level of debt. Now its very own capital structure will become a negative cash flow problem.

So for 3 cents a share and the stock trades at around $9.20. No one is expecting good news. This is the opportunity to clean house and position itself for the future. Think deep value here.

Buy ugly, sell pretty should be the game plan. Aluminum is core to the modern economy. Beer cans to aircraft components create a natural diversification. The winner will be the efficient operator.

Sure, Alcoa closed a few obsolete facilities. It needs to restructure financially, or someone will eat its lunch.