We have identified five materials stocks that pay high dividends in an industry that we believe can excel going forward. The materials industry has been beaten down by an overall weak global economy. Our materials companies range from commodities stocks to chemicals. We believe these companies are tied to global fundamentals, and although recent negative outlooks for global growth have placed pressure on this industry, we feel these companies are now on sale and pay relatively safe dividends that are much more appealing compared to treasuries. The companies mentioned below all have payout ratios at or below 80%, and dividend yields of at least 4%.
Vale SA (NYSE:VALE) is the Brazil-based metals and mining company. Vale is being hit with lower priced iron ore, which will force sales down 17% in 2012, after being up 30% in 2011. The company has positive prospects as demand for iron ore is expected to increase as China and East Asia grow. However, the major catalyst for this relies on a stimulus package in China. The company’s robust balance sheet, with a debt to equity ratio of 0.30 and a payout ratio of only 33%, should continue to easily support its high dividend, yielding the most of the our five materials stocks at 6.3%. Vale saw Arrowstreet Capital take a new position in the company that made the firm the largest fund owner by far in 2Q.
Cliffs Natural Resources Inc (NYSE:CLF), another iron ore mining company, pays a solid dividend that yields 6.2%, while only paying out 25% of earnings. The company is down almost 30% year to date after seeing sales up 45% in 2011, but expected to be down 6% in 2012. Cliffs has a strong market position in North America and is working on Asian expansion. As China’s manufacturing slows, Cliff is on our list of five stocks to watch. Last month S&P maintained its buy recommendation, holding a $50 price target versus a $44.50 trading price. Although a couple funds, namely Ken Fisher and Ken Griffin, decreased their stakes, other notable funds, Bridgewater Associates and Carlson Capital, increased their positions dramatically.
The Dow Chemical Company (NYSE:DOW), the largest U.S. chemical company, has the majority of its sales outside of North America, 64% for 2011. This will drag down 2012 sales, an expected decline of 2%, based on the company’s European exposure. Dow’s planned move toward less cyclical specialty chemicals and expansion into agricultural products will boost long-term earnings. Dow is expected to grow next year’s EPS by over 30%. Dow pays a dividend that yields 4.6%, and its payout ratio is 81%. Dow’s notable competitor, DuPont only pays a 3.5% dividend yield. By far the largest shareowner for 2Q among funds we track was Lansdowne Partners, with over 5.8 million shares.
Gold Fields Limited (NYSE:GFI), the gold miner, is paying a dividend that represents a 4.1% yield and is a payout of only 33%. Gold Fields is also a copper producer and one of John Paulson’s top gold picks. Gold Fields has been growing aggressively, taking a 19% interest in another one of John Paulson’s gold picks, IAMGOLD Corporation (NYSE:IAG). Gold Fields managed to grow first half 2012 revenues 6% and net income 35%, driven by strong South Africa and Australian segments. Gold Fields is also one of the top ten gold miners paying a dividend. For this reason, Jim Simons and Carlson Capital upped their 1Q stakes 40% and 130%, respectively, during 2Q.
CRH PLC (NYSE:CRH), the manufacturer of building materials, pays a 4.4% yield while only paying out 67% of earnings as dividends. The building materials industry, including cement, aggregates and concrete, is heavily tied to the housing market. As housing starts continue to remain below historical levels for the time being, CRH will be relying on boosts from government infrastructure spending and the expected modest housing recovery in 2013.
Despite poor housing starts, the company saw commercial construction spending was up 9% through the first half of 2012, and residential construction up 18%. Interestingly, environmental concerns should also allow CRH to see margin expansion as the pricing for aggregates holds up given mining restrictions. Admittedly, CRH saw little fund interest by share amount in 2Q, but does call some big names modest owners, including Jim Simons, D.E. Shaw and Steven Cohen.
Cliffs Natural and Vale both operate in the iron ore industry. They both compete against the two top iron-mining companies, BHP Billiton Limited (NYSE:BHP) and Rio Tinto plc (NYSE:RIO), but each trade rather cheaply relative to these competitors. While BHP trades at a P/E of 23x and Rio is at 12x, both Cliffs and Vale trade below 6x. Both of our companies also pay dividends well above those of BHP and Rio.
Gold Fields should do well in the future as gold is expected to see higher prices in 2013 on increased demand and the Federal Reserve’s renewed commit to keep rates low through 2015—see which gold stocks are great for playing QE3. Dow, our chemical company, should see continued demand, especially as it enters the agricultural market, which should help spur growth given increased demand for weather resistant seeds and agricultural products.
