Dividend Stocks

Freeport-McMoRan (NYSE:FCX) stock is biding its time. Everyone, including the company, is waiting for 2021. That’s when huge earnings and cash flow starts to kick in.

Tread Carefully, but Consider Freeport-McMoRan Stock a Buy

Source: MICHAEL A JACKSON FILMS / Shutterstock.com

Freeport-McMoRan reported lousy earnings for 2019 on Jan. 23. In fact, the copper and gold mining company lost money. Moreover, its free cash flow was negative.

However, everyone expected this. Freeport is spending large amounts of capital to bring two new mining operations online. The first is already ramping up production. The second starts to produce in 2021.

What Analysts Expect for Freeport- McMoRan Stock in 2021

Analysts are already modeling this production ramp in their forecasts. For example, here is what analysts polled by Seeking Alpha are predicting. In 2020, they expect 38 cents per share. But in 2021  it will earn per share of $1.20 — three times more.

Moreover, free cash flow (FCF) will swing hugely positive by then. In 2019 Freeport spent over $2.65 billion in capex. But its cash flow from operations (CFFO) was only $1.48 billion. So FCF was negative $1.17 billion.

But during Freeport’s last earnings peak in 2010 and 2011, FCF was $4.86 billion and $4.1 billion respectively. For example, in 2011 CFFO was $6.62 billion and capex was similar to this year at $2.53 billion. So we might expect the same thing in 2021.

Therefore, if earnings triple in 2021 we could expect CFFO to triple from $1.5 billion to $4.5 billion. So even if capex stays level at $2.5 billion or so, we could expect $2.0 billion in FCF for 2021.

As a result, that will have huge implications for Freeport-McMoRan stock. For one, the stock will start to rise dramatically. Second, the dividend will likely be hiked as well. Let’s look at the latter first.

Dividend Hike Expected for Freeport McMoRan Stock in 2021

Freeport has kept its dividend per share steady at five cents each quarter, or 20 cents per year, since 2018. This cost $291 million in 2019.

However, if FCF reaches $2 billion in 2021, Freeport-McMoRan could easily afford to triple its dividend payments. That would bring the annual dividend per share to at least 60 cents per share, or higher.

That would work out to 50% of expected earnings per share of $1.20 in 2021. That is roughly similar to what it paid out at the last earnings peak.

For example, from 2010 through 2014 Freeport-McMoRan earned $15.90 in diluted and normalized earnings per share, according to Seeking Alpha. But it paid out $6.93 in dividends per share.

Freeport-McMoRan stock - Div History

So that represented a 44% payout ratio during peak earnings. You can see this in the chart above, where the earnings are in green and dividends are in yellow.

How the Dividend Hike Will Affect Freeport-McMoRan Stock

The market will typically anticipate earnings and dividends six to 12 months in advance. That means that Freeport-McMoRan stock will start to expect a huge dividend increase in the next several months.

So what does that imply for its valuation? Let’s assume that the market will give Freeport a 3% or 4% dividend yield when it starts to pay out the higher dividends next year.

Therefore, that means that Freeport-McMoRan stock will reach between $15 and $20 per share by 2021. Here is how that works. Sixty cents in dividends divided by 4% equals $15 per share. And sixty cents divided by 3% equals $20 per share.

As a result, we can expect the stock to rise between $3 and $8 per share within the next year from its price today of around $12 per share. That represents an expected gain of 25% to 67%.

In other words, expect a huge spike in Freeport-McMoRan stock once the market begins to fully price in an expected hike in the dividend. This should happen as it becomes clearer that the two new mines are progressing further and will be producing large increases in cash flow starting in 2021.

Why Should Freeport-McMoRan Rise?

Right now the company trades at just a 1.68% dividend yield. But what I used in the model above assumed that Freeport-McMoRan stock would have a 3% to 4% dividend yield. Why did I use that number? After all, if the dividend yield is lower, the implied stock price will be much higher with the higher dividends.

The reason is that during the prior peak earning years of 2010 through 2014, Freeport-McMoRan stock traded in the 3% to 4% dividend yield range. For example, according to Seeking Alpha, the average yield between 2010 and 2014 was 3.1%. And from 2011 to 2014 the yield was 3.74%.

Therefore, it seems natural to assume that the yield will rise based on past history. Secondly, the market will push up Freeport-McMoRan stock in anticipation of the dividend hikes. But it may not know how long the higher dividends will last.

For example, Freeport-McMoRan had four or five peak earnings years, but then it cut the dividend. In fact, from 2016 to 2017 there was no dividend at all. So I think the market will be conservative and only push up the stock to a dividend yield of between 3% and 4%, not the 1.7% level at which it trades today.

Bottom Line With Freeport-McMoRan Stock

As 2021 get closer and the company announces higher earnings and cash flow, you can expect Freeport McMoRan stock to rise. This is because with the higher expected earnings in 2021, there will very likely be a much higher dividend payment.

I expect the stock to rise at least 46% to $17.43 or so (the average of 25% and 67%) based on its historical patterns of dividend yield, payout ratios, and dividend hikes.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review hereThe Guide focuses on high total yield value stocks. Subscribers get a two-week free trial.

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