Vale Stock: Strong Cash Flow Trends Pointing To Higher Share Price
Summary
- Shares were not able to break above multi-year highs in June of this year.
- Cash flow trends lead us to believe however that another onslaught is on the cards.
- We await a weekly swing before entering.
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If we look at a long-term chart of Vale S.A. (NYSE:VALE), we can see that shares tested multi-year resistance of over $20 a share in June of this year. Unfortunately for Vale, bulls, which few saw coming, shares did not have sufficient momentum to break through on this occasion and have in fact fell by approximately $8 a share (35%+ decline) since those June highs. It is fair to say that there have been multiple reasons for the significant decline in the share price. Firstly, Vale came in short with respect to estimates for its iron-ore production in Q2. Although output rose by over 11% in the quarter, analysts were expecting more from the miner. Earnings in the quarter were excellent from a comparable basis, but this was to be expected given the sky-high prices for iron-ore in the quarter.
Since then, though all has not been rosy as production guidance was cut in late July, stemming from licensing issues in Brazil and an internal strike in one of its operations in Canada. This is the inherent risk when investing in a mining company. The pricing of the commodity itself can be going to the moon, but if operations slow down for whatever reasons internally, it means the miner cannot take advantage of the sky-high selling prices on offer.
The main instigator though of the decline we have seen recently has been the collapse of the price of iron-ore. China is the culprit here as it has been restricting its steel production in order to get its emissions in order. The irony of this from Vale's standpoint is that its recently announced bumper dividend of $7.6 billion last month was not enough to change sentiment in the stock price. Suffice it to say, although the iron-ore price has been decimated over the past 4 months, Vale management sent out a message of confidence to its shareholders by approving the biggest dividend payment we have seen from the firm in two years.
To study this more closely, we are going to see how the company's cash flow has been trending in recent times. Vale's present price to cash-flow ratio comes in at an ultra-low 2.7, which is a number we have not witnessed in the company for quite some time and explains to some degree the recent bumper dividend payment. Remember on this statement, we are primarily focused on how the company's earnings have been converting into raw cash. It is cash at the end of the day, which rewards shareholders.
Over the past four quarters, Vale has reported over $26 billion in operating cash flow, which means that this key metric has grown by over 230% over the past four quarters alone. Furthermore, this number is almost 40% higher than the corresponding net profit number over the same time frame. From a shareholder's perspective, this is where we should be focusing most of our attention. The reason being is that this section of the cash flow statement is the cash version of the company's net profit in that profit numbers are adjusted to a cash model. Suffice it to say, strength in this section invariably benefits shareholders as the company can then use this cash to invest in more assets as well as compensate shareholders.
We state this because out of this operating cash flow purse of $26+ billion, just under $4.5 billion was used for capital expenditure, which meant there was over $21.5 billion of free cash flow left over for this period. Free cash flow is the most important metric in investing in our opinion and with good reason. It is essentially the money left over after all essential items in running the business plus tax and interest expense are paid. Now look at where this cash flow was put to work over the past four quarters. Almost $3 billion went towards an acquisition, almost $5 billion (net) went towards the company's debt-load, $9+ billion went towards dividends, $2 billion was used to buy back stock and even with all of these investments per se, there was still some cash left over to add to the balance sheet.
Suffice it to say, despite the sizable dividend payments in this period, management spent far more overall in areas such as investing behind the firm, bringing down debt and buying back stock. Trends such as these bode very well for book value growth which is obviously a win-win situation for long-term dividend growth investors.
In saying this, generating sizable amounts of cash flow is one thing but being able to return significant amounts of capital is entirely another. At present, Vale's return on invested capital over a trailing 12-month average comes in at approximately 33%. This number obviously looks great on the surface but Vale´s 5-year average ROIC number of approximately 12% really shows how cyclical this industry really is. Although we prefer companies which generate consistent high return on invested capital numbers, we would be giving Vale the benefit of doubt here due to how cheap its valuation currently is. We already touched on the ultra-low cash-flow multiple above but also, Vale's sales (P/S of 1.23) and assets (P/B of 1.71) remain well behind their 5-year respective averages (6.79 & 5.57 respectively).
Therefore, to sum up, despite the fact the Vale's sales and earnings are expected to not grow next year, the company's cash flow trends as well as its valuation leads us to believe that there remain strong gains ahead for this stock. We look forward to continued coverage.
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Elevation Code's blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays trading under intrisic value. To constantly put ourselves in positions where we have limited downside but yet significant upside always remains the objective of the portfolio.
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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in VALE over 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (38)
Oaktree Capital Management LP www.oaktreecapital.com
Impala Asset Management LLC www.impalafunds.com
Telemark Asset Management LLC -(source: www.edgr.io)Thanks for the article!
So, huge cash flow on iron ore.
Restoring io capacity have some delay, but will happen.
New product in iron ore, iron brickets. Good momentum.
Nickel and copper are running well, Onca Pumpa down since yesterday, not so big exposure.
Met coal business have a good momentum, maybe a spin off of coal Mozambique.
good progress on cash drains, like VNC. Samarco had a restart.
Debt is well under control.
Dividends are always generous. Buybacks are well established.
Still some issues on the damn disaster from 2019.In sum, enough things to do for Vale. Cash flow is still good.
Iron ore will rise again, if China restore the steel production again.
More buybacks on lower share price.
I think, a good moment to buy.
Short answer: it isn't. VALE Dividend History
Ex/EFF TYPE AMOUNTDECLARATION RECORD PAYMENT09/23/2021 CASH $1.506 09/30/2021 09/24/2021 10/08/2021
06/24/2021 CASH $0.438 06/18/2021 06/25/2021 07/08/2021
03/05/2021 CASH $0.736 02/26/2021 03/08/2021 03/22/2021
09/22/2020 CASH $0.25 09/11/2020 09/23/2020 10/07/2020
12/27/2019 CASH $0.222 12/20/2019 12/30/2019 08/14/2020
08/03/2018 CASH $0.305 07/26/2018 08/06/2018 09/27/2018
03/07/2018 CASH $0.123 02/28/2018 03/08/2018 03/22/2018
Who cares as anything over 9% is great to me and there should be capital appreciation this stock could double and be dirt cheap
The big problem for me is the pay the dividend only 2 times per year l8ike quarterly myself
