As 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)
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 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?