4 Reasons Why Dividend Investors Should Buy Vale Shares

| About: Vale S.A. (VALE)

For months, Chinese stocks have been one of the worst-performing sectors in the market and that is now leading some investors to go bargain-hunting. Since many accounting and other problems were found to be a major concern when investing in Chinese companies, some investors and fund managers believe the smartest way to play a rebound in China would be to buy stocks in companies that are heavily dependent on the economy in China, but not based in that country.

Policymakers in China have taken action to boost the economy with measures such as rate cuts. With a huge population base and rising incomes, China is poised to be a secular growth story for many years to come. That's why investors should look past the short-term growth concerns as they are likely to be only temporary in nature and use cheap valuations in many China related stocks as a buying opportunity. Here are 4 reasons why Vale (NYSE:VALE) shares could be an ideal way to play the eventual rebound in China:

1. Vale is a leading producer of iron ore which is used to make steel, and China is the largest consumer of steel. Slowing demand in China and other global concerns have reduced demand for steel and iron ore. That has pushed Vale shares to trade near 52-week lows, which has created a solid buying opportunity for longer term investors.

2. Recent data from China is showing that steel and iron ore demand from China may have bottomed-out. That news has caused iron ore prices to spike about 30% off of recent lows. Higher prices can lead to bigger profit margins for Vale. Policymakers in China recently approved about $156 billion in new infrastructure projects and as those project get started, additional iron ore demand could take place in the coming quarters. A recent Marketwatch article states:

Confidence among steel producers will pick up and steel prices will likely rebound slightly in the short term, as the country approved a series of infrastructure projects last month that will probably create huge demand for building materials including steel and cement," the state-run Xinhua news agency said in a report last week.

3. Vale shares currently yield about 6.3%, and that is significantly higher than the average stock in the S&P 500 Index, which now yields about 2%. Furthermore, the yield looks safe since the payout ratio is just around 45% of earnings estimates. This also means the company has room to raise the dividend in the future. That could lead to higher yields and a stock price increase in the future.

4. Vale shares look undervalued when compared to the S&P 500 Index, which currently yields about 2% and trades for about 15 times earnings. Vale trades for just around 7.4 times earnings and the dividend yield generously rewards investors while waiting for a rebound in the stock price.

Key Data Points For Vale From Yahoo Finance:

  • Current Share Price: $18.40
  • 52-Week Range: $15.77 to $26.87
  • Dividend: $1.15 which yields 6.3%
  • 2012 Earnings Estimate: $2.47 per share
  • 2013 Earnings Estimate: $2.84 per share
  • P/E Ratio: about 7.4 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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