Vale Has a Big Dividend But Is Upside Huge Too?

Brazilian mining giant Value (NYSE:VALE) is among the world’s largest producers of iron ore. Over the last year, Vale shares have lost nearly 25% of their value, resulting in significant losses for shareholders who bought at the stock’s previous highs.

But Vale has something else going for it, a very high dividend yield that could make it attractive, especially at today’s prices.

Is Vale’s dividend worth it, and can the stock rebound after its recent losses?

How High Is Vale’s Dividend?

Unlike most stocks, Vale doesn’t pay a set quarterly dividend. Instead, the company pays out a portion of its earnings on a semi-annual basis.

Over the last 12 months, the company has made two payments of $0.55 and $0.37. Based on the current stock price, Vale has a yield of about 6.36%.

Because its dividend payments are variable, however, it’s impossible to predict exactly what Vale’s forward yield will look like. 

A Look at Vale’s Recent Performance

Vale has recently emerged from a period of negative revenue growth. In 2022 and the first half of 2023, the company was reporting revenues declining sharply on a year-over-year basis. That trend ended in late 2023 and has modestly reversed itself since.

Though revenues are still lower than they were in 2021, they appear to have stabilized well above pre-2020 levels. For reference, Vale reported total revenues of $37.6 billion in 2019 and about $42.1 billion in the 12 months ending on June 30th of this year.

Earnings have followed a similar cycle, though they began to shrink later and have only begun to recover more recently. 2023 and early 2024 saw earnings decline, but Q2’s net income of $9.7 billion was more than double that of the year-ago quarter.

Crucially, Vale remained profitable throughout the period in which its revenues and net incomes were declining. The company’s trailing 12-month net margin stands at 23.1%.

Is Vale Valued Fairly?

To determine whether Vale’s dividend is worthwhile, investors must also decide whether or not they are paying a fair price for the stock.

At the moment, Vale trades at 1.1 times sales, 4.9x forward earnings, 4.3x cash flow and 1.2x book value. By all of these measures, Vale appears quite attractive from a value perspective.

It’s also worth noting that Vale is trading a bit below its recent historical P/E ratios, another sign that the company could be undervalued.

The cyclical nature of mining stocks still warrants some skepticism. Mining stocks like VALE can often trade at low prices for long periods of time before a new price cycle allows them to rebound.

Wall Street also appears to believe that Vale is undervalued at its current price. Analysts price targets for the stock range from $11.20 to $18.00 with a median of $15.00 per share.

At the median, these targets imply an upside of 39.4%. Even the lowest target of $11.20 per share translates to 4.1% upside.

Given that these targets don’t take into account Vale’s potential for high dividend yields, it seems that there may well be a good amount of room to see strong total returns on Vale shares for new buyers.

Does Vale Have a Moat?

Without a set annual dividend, a big question that arises is whether the Board of Directors can continue growing earnings over the long run in order to support future dividend growth.

Over the long haul, that kind of earnings growth likely requires an economic advantage that will keep Vale ahead of the competition.

Luckily for shareholders, Vale occupies an entrenched position in its market. In 2023, the company produced 321 million metric tons of iron ore.

Global production for the year was 2.5 billion metric tons, meaning that Vale accounted for nearly 13% of the world’s iron ore.

With such a large share of such a critical commodity, the company is more that likely going to sustain its competitive edge and economic moat.

Is Vale’s Dividend Worth It?

Vale’s 6.36% dividend appears to be worth buying given that the company has a wide moat and 45.7% upside to analysts consensus price target. Another factor to support buying the stock and its dividend is that the payout ratio is 61.6% suggesting payouts are likely to continue uninterrupted for some time.

Even a discounted cash flow forecast analysis pegs substantial upside opportunity for new buyers with fair value sitting at $15.17 per share.

And it’s not like Vale is burdened by excessive debt either, the debt-to-equity ratio of 0.4x is more than manageable, especially in a rate environment where interest costs are elevated.

Where headwinds to lie is on the growth trajectory. Analysts expect to see Vale’s earnings drop nearly 20% over the coming 12 months, a decline that could keep share prices depressed so Vale is not a great fit for traders looking for rapid gains. Those on the hunt for a stock that pays a pretty good yield and has upside though may find it a good match.

The good news is that Vale’s earnings are high enough that it will likely still be able to pay a fairly high dividend even if its net income declines. In the past 12 months, Vale’s earnings per share totaled $1.81. This was about twice its dividend payout, meaning that Vale’s dividend can likely stay strong throughout temporary future periods of lower earnings.

Dividends also make up only half of Vale’s strategy for returning cash to shareholders, the other half being share buybacks.

Since 2019, the number of VALE shares has dropped from 5.13 billion to 4.28 billion. If management keeps buying back shares at such a fast pace, it could provide extra support to share prices and continue concentrating the ownership stakes of shareholders who choose to hold for the long run.

In terms of ongoing income potential, Vale looks quite attractive. Even with somewhat unpredictable payouts, the stock’s yield is high enough to make it a significant source of cash flow for its shareholders. Combined with the potential for upside if Vale begins rebounding, there could be significant cumulative returns in VALE shares at today’s prices.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.