From an investment standpoint, the basic materials sector has been absolutely dreadful in 2013. Aggregate returns for all publicly traded companies in this space are -0.1% year-to-date, the only sector in the red. Due to this recent underperformance, it’s more important than ever for income investors to find names that can boost dividend payouts in the future; let’s take a look at three basic materials stocks that yield over 4% and have low payout ratios.
Compania de Minas Buenaventura
Compania de Minas Buenaventura SAA (NYSE:BVN) is a gold miner that has burned many investors this year. Shares of the Peru-based mid cap have lost over two-thirds over their value in 2013, completely destroying any hope investors had of capitalizing on its 4%-plus dividend yield. As we discussed a few weeks ago (read our full analysis of the gold mining industry), Compania de Minas has elected to shut down several unprofitable mines in the face of falling bullion prices.
In comparison to the sales of inefficient mines carried out by larger peers like Newmont Mining Corp (NYSE:NEM) and Barrick Gold Corporation (USA) (NYSE:ABX), Compania de Minas is taking a bit of a different approach to tackle the gold bear market. For investors betting on a recovery in the yellow metal sooner rather than later, this miner may be better positioned to capitalize because of its decision to hold onto higher-cost mines (while even buying some from peers like Newmont).
Minas pays just 27% of its earnings out as dividends, and the long-term dividend history is generally healthy. Cliff Asness, Howard Marks and Jim Simons are just a few of the noteworthy names invested in the stock (see the entire list here), so we’ll be watching how they treat it in the next round of 13F filings.
Sasol
Diversified chemicals and energy company Sasol Limited (ADR) (NYSE:SSL), meanwhile, is another under followed stock with a dividend payout ratio (40%) below many of its peers. Like Compania de Minas, Sasol is held by some of the hedge fund industry’s biggest stars, and it’s important to track these managers for their market-beating potential (discover why here).
In the case of this stock, the yield of nearly 4.6% is very attractive considering that free cash flows nearly sextupled last year, and Wall Street forecasts earnings to grow by almost 10% this year. Trading at just 11 times trailing EPS and generally fair valuation metrics across the board, it’s not unreasonable to park some money in Sasol with the hope of a dividend hike in the intermediate term. The company has returned 15% year-to-date and has paid biannual dividends 1996; outlays have nearly doubled in the past nine years.
Delek Logistics
Last but certainly not least, a third high-yield basic materials to watch is Delek Logistics Partners LP (NYSE:DKL). Unlike the aforementioned companies, Delek is a smaller cap name that’s focused on the oil and gas transportation services market. Shares have been up more than 30% this year on the back of some massive growth prospects expected from the Street. On average, the six analysts who cover this stock expect earnings to grow from $0.69 a share in 2012 to $1.99 by the end of this year, and by the end of 2014, this estimate rises to $2.21.
Obviously, earnings growth is one key ingredient to dividend growth, and Delek has issued quarterly payments for three consecutive quarters. Cash flows are positive after being poor in 2011, debt levels are about industry average and most analysts hold a generally upbeat outlook on the oil and gas transportation services macro environment. Although liquid fuel use fell slightly last year, the EIA expects modest growth in 2013 and 2014, which will be one driving factor behind Delek’s growth prospects.
Falling or stagnant crude oil prices represent one risk to this bullish outlook, as does a slowing economic recovery in the U.S. If, however, both of these threats fail to materialize enough to affect the earnings of Delek and other energy transportation companies, this could be a nice place to be invested in moving forward. The company reports third quarter earnings on November 4th, so we’ll be keeping a close eye on this date.
Disclosure: none
