CMC’s dividend yield
Previously in this series, we presented a complete business overview of Commercial Metals Company (CMC). Let’s now analyze CMC’s dividend yield and relative valuation ratios.
CMC offers an attractive dividend yield of 3.4%. This is higher than the dividend yields of CMC’s peers in the steel industry. However, dividend yield is not the only criterion to look at when making an investment decision. Let’s consider this in detail.
CMC has a beta of 1.47, which is lower than those of the company’s peers. Beta indicates a stock’s sensitivity to movement in broader markets. So, a beta of 1 means that a stock is likely to go up by 1% when the market moves up by 1%. Similarly, when the market goes down by 1%, the stock is likely to go down by a similar percentage.
CMC is also quite defensive when it comes to capital expenditure. The company spends less than 1.5% of its sales on capital expenditure.
Gerdau S.A. (GGB), Steel Dynamics (STLD), and Nucor (NUE) allocate a much higher proportion of their revenues on capital expenditure, as shown in the chart above. Currently, Nucor and Steel Dynamics are part of the SPDR S&P Metals & Mining ETF (XME).
When an enterprise makes higher capital investments, it is basically investing in future growth. However, the capital expenditure has to add shareholder value. An enterprise can also add shareholder value by cutting its investments.
CMC has exited several loss-making operations over the last few years, making it a leaner enterprise. Very recently, the company exited its steel-trading business in Australia. This frees up capital for future investments.
We will analyze CMC’s valuation relative to its peers in the next article.