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Alcoa Inc (AA): Searching for Great Stocks in Basic Materials

Do you have nerves of steel?

ArcelorMittal is an intriguing stock for investors interested in international diversification. The integrated steel-and-mining company, based in Luxembourg, carries a $20 billion market capitalization and has a presence in 60 countries worldwide.

Unfortunately, 2012 proved to be an extremely difficult year for ArcelorMittal and its investors. The company reported a $3.7 billion net loss, driven primarily by a 2.3% drop in steel shipments.

That being said, management is more optimistic about this year than last. The company expects reported earnings before interest, taxes, depreciation, and amortization (EBITDA) to be higher in 2013 as compared with 2012. In addition, steel shipments are expected to increase by 2%-to-3%, and margins are expected to improve, as well.

Let shareholder returns be your guide

Air Products provides reliable annual dividend increases in the high-single digit to low-double digit percentages. Over the past five years, the company has increased its shareholder payout by 10% compounded annually. It seems that year in and year out, no matter how challenging the prevailing economic climate, Air Products comes through with a 10% dividend increase.

Alcoa has taken measurable steps to reduce costs and right its ship after facing the worst economy in 2008 and 2009 since the Great Depression, but more work needs to be done. Buying Alcoa in the current environment may be more of a speculative bet than many investors would likely prefer. The company’s operating performance fluctuates wildly from year to year as a result of volatile aluminum prices.

Alcoa slashed its dividend in 2009 during the depths of the financial crisis. Unfortunately for investors, the company hasn’t  increased its dividend since then. Consequently, the current dividend amounts to a paltry 1.4% yield, hardly providing suitable downside protection.

ArcelorMittal still has a ways to go to recapture more solid financial footing, as well. To buy and hold this stock, investors must have the stomach for ups and downs that are inevitable with a global steel company. ArcelorMittal is currently trading 60% below book value, so investors who believe in the long-term direction of the company might not have a better opportunity than the one that exists today.

Had ArcelorMittal not altered its dividend policy, the stock would be a compelling opportunity. It paid 2012 dividends worth $0.75 per share. Unfortunately for investors, the ArcelorMittal’s board of directors has recommended the dividend be reduced to $0.20 per share for all of 2013. While still subject to shareholder approval, a dividend reduction would offer investors a yield of only about 1.5% at recent prices.

As a result, Air Products seems to be the most promising of the materials stocks presented here. Air Products trades for only 15 times trailing earnings and offers a long track record of reliable dividend increases.

The article Searching for Great Stocks in Basic Materials originally appeared on Fool.com and written by Robert Ciura.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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