'Safe' Basic Materials Upside Underdogs Led By Coal While Gold Seeks Broker Backers

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Includes: AHGP, ARLP, BAK, CELTF, CINR, CNXC, CSRLF, CTL, ERELY, MERC, NRP, NTR, PCHUY, SWM, SXCP, UFS
by: Fredrik Arnold

Summary

30 of 50 Basic Materials sector stocks showed free cash flow yields greater than dividend yields 3/1/17. Those 30 were tagged "safe" with current cash to cover dividends.

Top 10 "safe" March Basic Materials annual yields ranged 6.11% to 13.93% from CSRLF, ERELY; BAK; NLY; PCHUY; ARLP; CELTF; CINR; CNXC; SXCP. Their cash flow yields ranged 7.08%-35.37%.

Besides safety margin, "safe" Basic Materials stocks also reported payout ratios (lower is better), total annual returns, and dividend growth, as of 3/1/17 to further gauge their financial reliability.

Matched against top ten Dow Dogs, the "safe" Basic ten produced 135% more dividend returns at 18% of the top ten Dow Dog aggregate price.

Analyst one-year targets for top ten "safe" Basic Materialsstocks cast 19.14% LESS gain from $5k invested in the lowest priced five than from $5K invested in all ten.

The Dividend Dogs Rule

The "dog" moniker was earned by stocks exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs." More specifically, these are, in fact, best called, "underdogs."

March Basic Materials Underdogs

Yield (dividend / price) results from here verified by Yahoo Finance were calculated as of 3/1/17 for Basic Materials sector stocks. XN Micro-cap firms showed values below $200M(illion). Small cap firms were valued at $200M(illion) to $2B(illion); Mid cap firms were worth $2B to $10B; Large caps were valued above $10B. Those yield results led to the actionable conclusions discussed below.

Which Industries Are "Safe" In The Basic Materials Sector?

Nine of thirteen Basic Materials component industries were represented by the 30 "safe" firms whose dividends were bolstered by adequate cash as of March 2. The sector representation broke-out, thus: coal (4); industrial metals & minerals (8); gold (1); chemicals (3); steel (4); building materials (2); paper & paper products (5); agricultural inputs (1); specialty chemicals (1); aluminum (0); copper (0); lumber & wood production (0); silver (0).

Top ten basic materials "safe" dogs showing the best yields with a safety margin of cash to cover dividends by this screen as of March 2 represented the first six industries on the list above.

Basic Materials Sector Firms With "Safe" Dividends

Periodic Safety Inspection

You see grouped below the list of 30 that passed the Basic Materials dog "safety" check with sufficient annual cash flow yield to cover their anticipated annual dividend yield. The margin of excess is shown in the bold face "Safety Margin" column.

Corporate financial solvency, however, is readily undone by a capricious, careless, or conservative board of directors promoting company policies cancelling or varying the payout of dividends to shareholders. This article asserts that adequate cash flow is a strong justification for a company to sustain annual dividend increases.

Three additional columns of financial data, listed after the Safety Margin figures above, reveal payout ratios (lower is better), total annual returns, and dividend growth levels for each stock. This data is provided to reach beyond yield to select reliable payout stocks. Positive results in all five columns after the dividend ratio is remarkable as a solid financial signal.

Dividend vs. Price Compared to Dow

Ten top "safe" Basic Materials dividend dog stocks by yield were graphed below as of 3/1/17 and compared to those of the Dow. Annual dividend amounts from $1000 invested in each of the ten highest-yielding stocks and their aggregate single share price created the data points shown in green for price and blue for dividends.

Actionable Conclusions: (1) Top Basic Materials Dog Dividend Is 84% Of Price While (2) Dow Dogs Price Is 70% More Than Its Dividend

Ten top "Safe" Basic Materials Index dogs aggregate single share price for top ten yielding dogs was calculated as 16% of the dividend derived from $10k invested as $1k in each of the top ten stocks.

Meanwhile, Dow dogs aggregate single share price for top ten yielding dogs was 70% of the dividend derived from $10k invested as $1k in each of the top ten stocks.

As a result, the Dow dogs overbought condition (where aggregate single share price of the ten exceeded projected annual dividend from $10k invested as $1k in each) shows as a huge pricing disadvantage for new investors.

The Overbought Dow

The Dow Dogs remain overbought and overpriced, meaning these are low-risk and low-opportunity Dow dogs. The Dow top ten average price per dollar of annual dividend was $28.61 March 2.

In sharp contrast to the Dow, "Safe" Basic Materials dividend dog top ten average price per dollar of annual dividend was $11.48 as of 3/1/17. That's 40% of the the price for a dollar of Dow annual dividends.

To quantify top dog rankings, analyst mean price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metric, analyst mean price target estimates provided another tool to dig out bargains.

Actionable Conclusion (3): Wall St. Brokers Forecast A 3.73% 1 yr. Average Upside and 8.15% Net Gain From the Top 30 "Safe" Basic Materials Index Stocks

Top dogs on the "Safe" Basic Materials stock list were graphed above to compare relative strengths by dividend and price as of March 1, 2017 with those projected by analyst mean price target estimates to the same date in 2018.

Historic prices and actual dividends paid from $10,000 invested as $1K in each of the ten highest yielding stocks and the aggregate single share prices of those ten stocks created the data points applied to 2017. Projections based on estimated increases in dividend amounts from $1000 invested in the ten highest-yielding stocks and aggregate one-year analyst mean target prices as reported by Yahoo Finance created the 2018 data points in blue for dividend and green for price. Note: One-year target prices from one analyst were usually not applied (n/a).

Analysts projected an 4.3% lower dividend from $10K invested as $1k in the top ten March Basic Materials "Safe" dogs while aggregate single share price was projected to increase by 3.2% in the coming year.

The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the above chart. Three to nine analysts were considered optimal for a valid projection estimate. Estimates provided by one analyst were usually not applied (n/a).

A beta (risk) ranking for each stock was provided in the far right column. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stock price movement opposed to market direction.

Actionable Conclusion (4): Analysts Predicted Top Ten Basic Materials Sector "Safe" Dog Stocks Could Net 5.7% to 72.6% Gains By March 2018

Six of the ten top "safe" dividend Basic Materials dogs (tinted gray in the chart above) were verified as being among the Top ten gainers for the coming year based on analyst 1 year target prices. Thus the dog strategy for this Basic Materials sector as graded by analyst estimates for March proved 60% accurate.

Ten probable profit-generating trades were illustrated by YCharts analytics for 2018:

CNX Coal Resources (CNXC) netted $396.05 per estimates from seven analysts, plus dividends less broker fees. A Beta number was not available for CNXC.

SunCoke Energy Partners (SXCP) netted $292.38 based on a median target price from three analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 29% more than the market as a whole.

Ciner Resources (CINR) netted $212.12 based on dividends plus the median of annual price estimates from four analysts less broker fees. The Beta number showed this estimate subject to volatility 13% more than the market as a whole.

Mercer International (MERC) netted $209.39 based on dividends plus the median target price estimate from seven analysts less broker fees. The Beta number showed this estimate subject to volatility 43% more than the market as a whole.

Alliance Resource Partners (ARLP) netted $203.40 based on mean target price estimates from six analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 44% less than the market as a whole..

Schweitzer-Mauduit International (SWM) netted $185.09 based on estimates from two analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 12% more than the market as a whole.

Agrium (AGU) netted $146.48 based on target price estimates from twenty analysts, plus dividends less broker fees. The Beta number showed this estimate subject to volatility 18% less than the market as a whole.

Alliance Holdings (AHGP) netted $133.18, based on dividends plus target price estimates from one analyst plus dividends with broker fees subtracted. The Beta number showed this estimate subject to volatility 60% less than the market as a whole.

Domtar (UFS) netted $102.25, based on dividend, plus a median target price estimate from thirteen analysts, less broker fees. The Beta number showed this estimate subject to volatility 58% more than the market as a whole.

Centamin (CTL) netted $57.50 based on no target estimates from any analysts, just dividends, less broker fees. The Beta number showed this estimate subject to volatility 50% less than the market as a whole.

Average net gain in dividend and price was 19.38% on $1k invested in each of these ten "Safe" Basic Materials dogs. This gain estimate was subject to average volatility 12% less than the market as a whole.

Actionable Conclusion (5): (Bear Alert) Analysts Expected One "Safe" Basic Materials Sector Dog To Make A 31.27% Loss By March 2018

A probable losing trade revealed by Thomson/First Call in Yahoo Finance for 2018 was:

Natural Resources Partners (NRP) projected a loss of $312.77 based on dividend and a median target price estimate from five analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 65% less than the market as a whole.

Dog Metrics Found No Bargains From Lowest Priced "Safe" Dividend Basic Materials Sector Stocks

Ten "Safe" Basic Materials firms with the biggest yields March 1 per YCharts data ranked themselves by yield as follows:

Actionable Conclusions: (6) Analysts Expected 5 Lowest Priced of Ten "Safe" Dividend High Yield Basic Materials Sector Dogs, To Deliver 11.87% Vs. (7) 14.68% Net Gains from All Ten by March 2018

$5000 invested as $1k in each of the five lowest priced stocks in the "safe" ten Basic Materials pack by yield were determined by analyst 1 year targets to deliver 19.14% less net gain than $5,000 invested as $.5k in all ten. The fifth lowest priced safe dividend Basic Materials dog, CNX Coal Resources (CNXC) showed the best net gain of 39.60% per analyst targets.

Lowest priced five "safe" Basic Materials dogs as of March 1 were: Centamin (OTCPK:CELTF); CSR (OTCPK:CSRLF); Erdemir (OTCPK:ERELY); PTT Global Chemical (OTCPK:PCHUY); CNX Coal Resources, with prices ranging from $2.00 to $16.70.

Higher-priced five "Safe" Dividend Basic Materials Sector dogs as of March 1 were: SunCoke Energy Partners (SXCP); Braskem (BAK); Alliance Resource (ARLP); Ciner Resources (CINR), and Alliance Holdings (AHGP) with prices ranging from $17.05 to $28.79.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. Its also the work analysts got paid big bucks to do.

Caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

The net gain estimates mentioned above did not factor-in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article and this instablog to aid your safe investing.

Stocks listed above were suggested only as possible starting points for your safe dividend Basic Materials Sector research process. These were not recommendations.

Three of these Basic Materials dividend pups qualified as great catches! One is as strong contneder for dividend Dog Of The Year (DOTY). Find it among the now 52 Dogs of the Week (DOTW)I or among 27 DOTWII found on The Dividend Dog Catcher premium site. Click here to subscribe or get more information.

It's about time to make investing fun again. For a free copy of the monthly top dogs, the quarterly winners, and the dog of the year and runners-up from the 52 Dogs of the Week (DOTW) I portfolio, plus a glimpse at the top dogs in DOTW II, send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any sport or activity to: fredrika120@gmail.com, or click "send message" below my name under the headline above this article. Remember: E-mail, ticker, team!

Root for the Underdog.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from www.ycharts.com; www.finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance. Dog photo from: bopfish.blogspot.com.

Disclosure: I am/we are long VZ, PFE, GE, CSCO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.