Income investors tend to avoid cyclical companies because of their volatility and unpredictable dividends.
But there are a few exceptions to the rule and Russel Metals is one of them. I recently recommended the stock to readers of my Income Investor newsletter. Here’s the background.
Russel Metals Inc. (TSX: RUS)
Type: Common stock
Recent price: C$33.76
Annual payout: $1.52
Yield: 4.5 per cent
Risk Rating: Higher risk
The business: Toronto-based Russel Metals is one of the largest metals distribution companies in North America with a growing focus on value-added processing. It carries on business in three segments: metals service centres, energy products, and steel distributors.
Its network of metals service centres carries an extensive line of metal products in a wide range of sizes, shapes, and specifications, including carbon hot rolled and cold finished steel, pipe and tubular products, stainless steel, aluminum, and other non-ferrous specialty metals.
Its energy products operations carry a specialized product line focused on the needs of energy industry customers. Its steel distributors operations act as master distributors selling steel in large volumes to other steel service centers and large equipment manufacturers mainly on an “as is” basis.
The security: I recommend the common stock of Russel Metals, which trades on the TSX and the over-the-counter market in the U.S.
Why I like it: Two reasons. First, this is a cyclical stock – its long-term chart looks like a mountain range of peaks and valleys. Right now, it’s close to a cyclical peak but there still appears to be upside potential. Second, yield. The stock has paid a consistent $0.38 a quarter for many years. At current prices, that works out to a yield of 4.5 per cent.
Financial highlights: The company released its third-quarter results on Nov. 4, and they were impressive. Revenue was $1.1 billion, up from $615 million in the same quarter of 2020. For the first nine months of the fiscal year, revenue was $3.1 billion, up from $2 billion last year.
Net income for the quarter was a record $132 million ($2.10 per share). That compared to $18 million ($0.29 per share) last year. For the nine-month period, earnings were $330 million ($5.28 per share), up from $33 million ($0.54 per share) in 2020.
EBITDA was $196 million for the quarter compared to $47 million in the same quarter of 2020.
Outlook: Short-term positive. As mentioned, this is a cyclical stock and current economic conditions are working in its favour. Steel prices continued to rise in the third quarter. Metals service centres experienced an increase in selling price per ton of 87 per cent compared to the 2020 third quarter and 19 per cent compared to the 2021 second quarter. Demand is expected to remain strong for the remainder of 2021, resulting in a favourable supply and demand balance.
Risks: The cycle will run its course and the share price will fall again. The stock traded as low as $14.65 as recently as May 2020.
On the positive side, the dividend has remained consistent at $0.38 per quarter for years, through good times and bad. There’s been no dividend growth, but investors have been able to rely on steady cash flow.
Distribution policy: Dividends are paid quarterly. The next one will be distributed on Dec. 15 to shareholders of record as of Nov. 24.
Tax implications: As this is a Canadian company, the dividend tax credit applies if the shares are held in a non-registered account.
Who it’s for: This stock is suitable for investors who are looking for dependable cash flow and who can live with the ups and downs of the share price.
How to buy: The stock trades mainly on the TSX, with an average daily volume of about 217,000 shares. U.S. residents can buy it over-the-counter, but volume is light so a limit order is recommended.
Summing up: The business may be cyclical, but the dividend isn’t. There’s no growth when times are good, but no slashes either when a downturn hits.