Are Gold Stocks Cheap?

Gold Bullion BarsAs a dividend investor, I certainly would never have considered gold stocks as a possible investment for my portfolio. In fact I haven’t even invested in gold, and have missed the big run-up in gold bullion over the last few years. I’ve always considered gold and gold stocks as speculative investments to be avoided. However the price of gold bullion and the share value of gold producers are not always correlated. Currently gold is only 7% off its March highs, with a troy ounce of gold currently trading at $1662 USD. Conversely, the world’s two largest gold producers by market cap, Barrick Gold Corp. (ABX) and Goldcorp Inc. (G), have been steadily declining in share price and are trading only 10% above their 3-year lows. In other words the price of gold and the price of gold producers are currently inversely-correlated. What’s going on, is there a bargain to be had in gold stocks?

The Fundamentals Are Solid

Barrick and Goldcorp are not junior exploration companies or penny stocks, where many investors have lost more than a penny. These are big established international gold producers, valued over 31 and 38 billion each in market cap and with solid fundamentals. Barrick is also the world’s largest gold producer in terms of profit and production tonnes.  Gold stocks never would have crossed my mind. But when staff writer Vicky recently wrote her post on XIC, and her current post coming up on XIC versus XIU, I was intrigued to see both Barrick and Goldcorp in the top ten holdings. I was also surprised to see the declining share values.

Ironically the big gold producers are also less volatile than you may think. You would never know it when you look at a 2 or 3 year chart of either company, as share price seems to be quite volatile. It’s surprising to note however that Barrick Gold has a beta of only 0.483, making it only half as volatile as the TSX Composite Index.  Goldcorp has a beta of only 0.73 compared to the TSX. Add on lower than average debt levels, and low payout ratios, and you certainly have some food for thought. Not only are these stocks cheap in price right now, they also have solid earnings, positive cash flow, and strong balance sheets.

Barrick Gold (ABX)

View chart for Barrick Gold (ABX)

2 Year Chart for Barrick Gold (ABX)

Take Barrick Gold as an example, a 39.8 billion dollar company, which has a current return on equity of 17.93% and a profit margin of 31.33%. It has a price to book ratio of only 1.53, and a debt-to-equity ratio of only 52.32. Compared to many other big blue-chip companies, these are some pretty solid numbers.

Where Barrick falls off the radar for many dividend investors is with the low yield of 1.5%. However, companies with lower yields also have the potential for more growth in their share price. Barrick Gold pays an annual dividend of 0.59 cents per share with an EPS (earnings per share) of $4.57. That gives an incredibly low dividend payout ratio of 12.9%. Obviously there is more than enough room for Barrick to pay its dividends, increase them, and maintain its business operations. I would be more concerned if a company like Barrick Gold actually did pay a hefty dividend. ;)

Goldcorp Inc. (G)

goldcorp-g-20120428

2 Year Chart for Goldcorp (G)

Goldcorp is the world’s second leading gold producer. Goldcorp is a $31.0 billion dollar company, which has a current return on equity of 8.84% and a profit margin of 35.08%. It has a price to book ratio of 1.41, and an incredibly low debt to equity ratio of 3.43. Like Barrick, Goldcorp pays a low dividend yield of 1.41%. It pays an annual dividend of 0.53 cents per share with an EPS of $2.39. That gives Goldcorp a low dividend payout ratio of 22.1%. In comparison to Barrick, it has much lower debt and a slightly higher profit margin.

What’s Driving the Price Down?

Both Barrick and Goldcorp have been experiencing a sharp decline in their share prices this year. For example Goldcorp is off some -30% from its high of $54.95per share back in November, and currently trades at $38.38 per share. Barrick Gold is also off from its highs, some -26.2% from its high of $54.05 back in November, to its current price of $39.88 per share. 2012 hasn’t been a good year for investors who own shares in the big gold producers, and there’s likely more room for decline.

What’s causing the decline in share prices? Has the demand for gold simply run out of steam? Is the price of gold and gold production topped out? That’s a likely possibility. China the world’s economic engine and largest exporter indicated their economy was slowing down this month, and troubles in Europe have certainly made investors and consumers nervous. With less overall demand for commodities, including gold, there has certainly been a noticeable drop in the share price of gold producers. Another less noticeable possibility may be share dilution. Regardless, at some point there is going to be a buy opportunity in this sector.

Proceed With Caution

Here is why the big Gold producers Barrick and Goldcorp are on my radar:

  • They are trading at a lower price point
  • They have lower than average debt (especially Goldcorp)
  • They have a low beta (who would have thought?)
  • They have a very low dividend payout ratio
  • Low dividend stocks have higher growth potential
  • There will always be a global demand for gold
  • Barrick and Goldcorp are the world’s largest gold producers

However, I’m not ready to jump in quite yet on either of these stocks, especially with commodity demand as the main driver for lower prices. I also suspect there is still some more room left for a decline in share price. Also be wary of the lower beta. However, the price points are looking quite attractive compared to only a few months ago, the fundamentals are solid, and these companies are on my radar.

Readers, what’s your take? Do you think gold stocks are cheap? Would you consider adding gold stocks like Barrick and Goldcorp to your dividend portfolio?

38 Responses to “Are Gold Stocks Cheap?”

  1. Peter

    Apr 29. 2012

    Good, interesting post, because I never ever considered the gold stocks. Now, this is food for thought….

    Reply to this comment
  2. Peter

    Apr 29. 2012

    Good, interesting post, because I never ever considered the gold stocks. Now, this is food for thought….

    Reply to this comment
  3. Vicky

    Apr 30. 2012

    I’ve personally never held gold companies in my portfolio, but I used to have XGD, which is a gold ETF (of course! :) ), and i’ve definitely noticed that it is trading a lot lower than when I sold it. That being said, I have no plans to add it back into my portfolio again right now, but its definitely on my watchlist. It will be interesting to see if you decide to add it to your portfolio!

    Reply to this comment
    • The Dividend Ninja

      Apr 30. 2012

      Hey Vicky I bet your glad you sold XGD a while ago, hoping you made a golden profit on that one. :) I suppose you could make a play on XGD again with a small amount of capital.

      However with your holdings in XIC, 5.5% of that ETF is already in Goldcorp and Barrick, and even more if you hold XIU, right? I’m sure Kinross and a couple of other gold producers are in there as well. So you already have a 6% to 7% stake in the gold producers by default of owning XIC or XIU.

      Yes, I’m waiting to see where these stocks go over the next few months. Still a little early to tell…

      Cheers

      Reply to this comment
      • TM @ Young and Thrifty

        Apr 30. 2012

        Hey DN, love the golden pun. I guess when it comes to Gold companies all that glitters is not gold! I’ve always found it weird to truly judge the value of gold or gold mining companies. I understand the intrinsic value in a company like Wal-Mart or Proctor and Gamble, butis such a weird substance to invest in. I shy away from it just because it has such a weird history, and the fact that gold prices are not correlating to companies whose basic sole production is gold is worrisome to a simple passive investor like me. Interesting case study.

        Reply to this comment
  4. Vicky

    Apr 30. 2012

    I’ve personally never held gold companies in my portfolio, but I used to have XGD, which is a gold ETF (of course! :) ), and i’ve definitely noticed that it is trading a lot lower than when I sold it. That being said, I have no plans to add it back into my portfolio again right now, but its definitely on my watchlist. It will be interesting to see if you decide to add it to your portfolio!

    Reply to this comment
    • The Dividend Ninja

      Apr 30. 2012

      Hey Vicky I bet your glad you sold XGD a while ago, hoping you made a golden profit on that one. :) I suppose you could make a play on XGD again with a small amount of capital.

      However with your holdings in XIC, 5.5% of that ETF is already in Goldcorp and Barrick, and even more if you hold XIU, right? I’m sure Kinross and a couple of other gold producers are in there as well. So you already have a 6% to 7% stake in the gold producers by default of owning XIC or XIU.

      Yes, I’m waiting to see where these stocks go over the next few months. Still a little early to tell…

      Cheers

      Reply to this comment
      • TM @ Young and Thrifty

        Apr 30. 2012

        Hey DN, love the golden pun. I guess when it comes to Gold companies all that glitters is not gold! I’ve always found it weird to truly judge the value of gold or gold mining companies. I understand the intrinsic value in a company like Wal-Mart or Proctor and Gamble, butis such a weird substance to invest in. I shy away from it just because it has such a weird history, and the fact that gold prices are not correlating to companies whose basic sole production is gold is worrisome to a simple passive investor like me. Interesting case study.

        Reply to this comment
  5. farcodev

    Apr 30. 2012

    I didn’t seen that G pay a dividend 8)

    I will perhaps consider it, but as you say w/ gold we haven’t perhaps reached the bottom yet.

    It requires some analysis and ask to follow how behave the stock over time ;)

    Reply to this comment
    • The Dividend Ninja

      Apr 30. 2012

      FarconDev Goldcorp (G) does indeed pay a dividend, albiet a low yield at 1.4%:

      http://www.theglobeandmail.com/globe-investor/markets/stocks/summary/?q=G-T

      I do believe as well there is more room for the bottom – this could be a cyclical trend in mining and commodities in general, as well as gold itself. I wouldn’t even begin to entertain to second guess that one, I’ll just wait to see where these stock prices go. ;)

      I also want to add the point, this is an investment for someone who already has a sizeable and well-diversified portfolio, and is looking for an additional opportunity. It should not be considered a core holding.

      Cheers

      Reply to this comment
  6. farcodev

    Apr 30. 2012

    I didn’t seen that G pay a dividend 8)

    I will perhaps consider it, but as you say w/ gold we haven’t perhaps reached the bottom yet.

    It requires some analysis and ask to follow how behave the stock over time ;)

    Reply to this comment
    • The Dividend Ninja

      Apr 30. 2012

      FarconDev Goldcorp (G) does indeed pay a dividend, albiet a low yield at 1.4%:

      http://www.theglobeandmail.com/globe-investor/markets/stocks/summary/?q=G-T

      I do believe as well there is more room for the bottom – this could be a cyclical trend in mining and commodities in general, as well as gold itself. I wouldn’t even begin to entertain to second guess that one, I’ll just wait to see where these stock prices go. ;)

      I also want to add the point, this is an investment for someone who already has a sizeable and well-diversified portfolio, and is looking for an additional opportunity. It should not be considered a core holding.

      Cheers

      Reply to this comment
  7. I too find gold to be a speculative investment. It’s not so much the gold mining that I don’t understand, it’s where and how it’s used. Aside from jewelry and semi-conductors, how is gold used? For example, I understand how the world economy uses oil and how people consume Coca-Cola products, but I am not sure about gold or even silver for that matter. That’s one major reason why I don’t own it.

    Reply to this comment
    • The Dividend Ninja

      Apr 30. 2012

      PIE, I think most of the world’s leading countries have enourmous stock-piles of gold as a hedge against their currencies and ecomonic events – that’s where most of the world supply is used. For example the U.S. dollar was hedged with gold until the 80’s. For that reason alone gold holds value, but not its not like buying PG, and doesn’t pay you a dividend or a coupon payment. And yes people have adorned themselves with gold for thousands of years, and the industrial use is minimal.

      While not an income producing investment, it is nonetheless an investment, albiet I have always viewed it as a specualtive one myself. I just see an opportunity at some point in this sector. ;)

      Cheers

      Reply to this comment
  8. I too find gold to be a speculative investment. It’s not so much the gold mining that I don’t understand, it’s where and how it’s used. Aside from jewelry and semi-conductors, how is gold used? For example, I understand how the world economy uses oil and how people consume Coca-Cola products, but I am not sure about gold or even silver for that matter. That’s one major reason why I don’t own it.

    Reply to this comment
    • The Dividend Ninja

      Apr 30. 2012

      PIE, I think most of the world’s leading countries have enourmous stock-piles of gold as a hedge against their currencies and ecomonic events – that’s where most of the world supply is used. For example the U.S. dollar was hedged with gold until the 80’s. For that reason alone gold holds value, but not its not like buying PG, and doesn’t pay you a dividend or a coupon payment. And yes people have adorned themselves with gold for thousands of years, and the industrial use is minimal.

      While not an income producing investment, it is nonetheless an investment, albiet I have always viewed it as a specualtive one myself. I just see an opportunity at some point in this sector. ;)

      Cheers

      Reply to this comment
  9. Liquid

    May 01. 2012

    I think gold companies are undervalued too. I bought some Goldcorp before at around $45. I’m waiting for a bottom and then buying some more :0)

    Reply to this comment
  10. Liquid

    May 01. 2012

    I think gold companies are undervalued too. I bought some Goldcorp before at around $45. I’m waiting for a bottom and then buying some more :0)

    Reply to this comment
  11. Ax R

    May 07. 2012

    I am thinking of buying Barrick for my portfolio as hedge for poor economic times due to the beta score.

    Reply to this comment
    • The Dividend Ninja

      May 08. 2012

      Hey Ax R thanks for posting! I just wanted to mention that just because a stock has a lower beta, doesn’t mean it will not decline in value or that it is a safer stock. ABX and G still have wide swings in their share prices – just pointing out there may be an opportunity in this sector. ;)

      Reply to this comment
  12. Ax R

    May 07. 2012

    I am thinking of buying Barrick for my portfolio as hedge for poor economic times due to the beta score.

    Reply to this comment
    • The Dividend Ninja

      May 08. 2012

      Hey Ax R thanks for posting! I just wanted to mention that just because a stock has a lower beta, doesn’t mean it will not decline in value or that it is a safer stock. ABX and G still have wide swings in their share prices – just pointing out there may be an opportunity in this sector. ;)

      Reply to this comment

Trackbacks/Pingbacks

  1. Dividend Hit Time - May 4th, 2012

    [...] 4. Are Gold Stocks Cheap? @ Dividend Ninja. [...]

  2. Dividend Hit Time - May 4th, 2012

    [...] 4. Are Gold Stocks Cheap? @ Dividend Ninja. [...]

  3. Weekend Readings – How Much Would You Pay For A Scream? « Intelligent Speculator - May 5th, 2012

    [...] -Are Gold Stocks Cheap? @ Dividend Ninja. -Build your own Berkshire @ DividendGrowthInvestor -Top Canadian dividend stocks @ TheDividendGuyBlog [...]

  4. Weekend Readings – How Much Would You Pay For A Scream? « Intelligent Speculator - May 5th, 2012

    [...] -Are Gold Stocks Cheap? @ Dividend Ninja. -Build your own Berkshire @ DividendGrowthInvestor -Top Canadian dividend stocks @ TheDividendGuyBlog [...]

  5. Sunday Link Charity # 22 - Cinco de Mayo Weekend Edition - May 6th, 2012

    [...] investing in gold still looks attractive. So, should you invest in gold? How much are gold stocks? Are gold stocks cheap? This post has all your [...]

  6. Sunday Link Charity # 22 - Cinco de Mayo Weekend Edition - May 6th, 2012

    [...] investing in gold still looks attractive. So, should you invest in gold? How much are gold stocks? Are gold stocks cheap? This post has all your [...]

  7. Gold Bullion versus Gold Producers | The Dividend Ninja - June 12th, 2012

    [...] 12th, 2012 The Dividend Ninja Gold0 comments In a previous post, Are Gold Stocks Cheap, I looked at two of the world’s leading gold producers Barrick (ABX) and Goldcorp Inc (G).  Both [...]

  8. Gold Bullion versus Gold Producers | The Dividend Ninja - June 12th, 2012

    [...] 12th, 2012 The Dividend Ninja Gold0 comments In a previous post, Are Gold Stocks Cheap, I looked at two of the world’s leading gold producers Barrick (ABX) and Goldcorp Inc (G).  Both [...]

  9. Barrick Gold vs. Goldcorp | The Dividend Ninja - July 19th, 2012

    [...] Ninja Gold0 comments Back in April I wrote an interesting post asking the question Are Gold Stocks Cheap?  In that post I looked at the two leading gold producers, Barrick Gold (ABX), and Goldcorp Inc. [...]

  10. Barrick Gold vs. Goldcorp | The Dividend Ninja - July 19th, 2012

    [...] Ninja Gold0 comments Back in April I wrote an interesting post asking the question Are Gold Stocks Cheap?  In that post I looked at the two leading gold producers, Barrick Gold (ABX), and Goldcorp Inc. [...]

Leave a Reply

*