Vale (VALE3) or Gerdau (GGBR4): Who has more profits in the metals sector?

Vale (VALE3) or Gerdau (GGBR4): Who has more profits in the metals sector?

Raw material producers gained space in analysts’ recommendations for dividend strategies in 2022. But while oil companies, especially Petrobras, have become near consensus, by offering the highest dividend yields on Ibovespa, companies dedicated to mineral commodities are currently sharing the market. Fluctuations in prices, expensive shipping and doubts about the Chinese economy have put into question the future results of the mining and steel companies.

For example, mining company Vale (VALE3) lost its spot in the sun among the world’s top ten dividend companies in the second quarter of 2022 – It ranked ninth in the previous quarterAccording to Janus Henderson Global Dividend Index. In the survey released last week, the British director highlighted that mining companies’ profits could have peaked, which could precede a decline in dividends.

In the recommended dividend portfolios for brokerages and analysis houses, the effect is still unclear. Until August, Vale was still the most recommended procedure by ten houses accompanied by Infomoney – But it is no longer a leader in isolation, but sharing the platform with shares of Banco do Brasil (BBAS3).

On the other hand, Gerdau Steel Company (GGBR4) has caught the attention of analysts, especially after the release of the balance sheet for the second quarter of 2022. Some prefer the shares of Gerdau in the short term, but still believe in Vale in the long term, while others are already proposing to replace the second For the first in the wallet.

see also:

• Petrobras has become the world’s largest dividend payer. see ranking

• Gerdau (GGBR4) remained preferred among steel stocks after the results. Check industry forecasts

Jose de Matos, an analyst at Toro Investimentos, remains bullish, although he recognizes that Vale’s stock is likely to suffer in the short term. In his view, the miner has shown operational strength in recent years, but discounted due to the increase in uncertainty over Chinese demand for steel and volatility in iron ore prices. Vale is trading its accounts at an EV/EBITDA (company’s value on operating cash generation) multiple of 2.5 times, which is well below the historical average of 4.4 times.

“Vale is a cyclical but powerful company, and we believe that scenario has not changed. We are designing a profit return [taxa de retorno com dividendos] 15% for 2022, with a target price of R$130,” says Matos.

The miner started paying big dividends from 2021. According to data from Comdinheiro, this year has been that year profit return of the company exceeded 15%. Prior to this, the ratio did not exceed 6.5%. Vale’s dividend policy has also gained regularity only recently, starting in 2020. According to Enrico Cozzolino, an analyst at Levante Investimentos, the miner pays dividends twice a year: in March, referring to the results of the second half of the previous year, and in September, on First half results.

“The reward is 30% of the adjusted Ebitda (earnings before interest, taxes, depreciation, and amortization), discounting the current investment,” he explains. Vale may continue to pay an extraordinary dividend, which is usually dissolved by the board of directors in December, although analysts do not believe this will happen in 2022.

Cozzolino also believes that business cyclicality doesn’t cancel out Vale’s dividend fundamentals. He points out that although rises (or declines) in commodity prices favor (or hurt) corporate results in the short term, these effects should not prevail for those who build a portfolio with a long-term goal. In this case, says Cozzolino, it is crucial to invest in structured companies and favorable dividend policies.

Vale reported net income of $6.2 billion in the second quarter of 2022, down 18% from the same period the previous year, and Ebitda of $5.5 billion, results below analysts’ expectations — which, in some cases, even lowered Action recommendations.

Despite this, while the market believed the miner would pay a lower dividend, Vale announced a payment of R$3.57 per share for the month of September, equivalent to profit return 5.31% in the second quarter, very similar to March of this year, from R$3.72 per share and fruit 5.27%.

The company has proven that dividend payout is not affected by short-term results. We believe that in the first half of 2023 dividends should remain high,” says Cozzolino.

However, challenges remain, with a timid recovery in iron ore prices and an economic slowdown not only in China, but also in the United States and Europe.

Gerdao highlights

After earning R$4.3 billion in the second quarter of 2022, Gerdau’s shares entered steelmaking preferences. This has extended to analytics of dividend prospects, although few analysts see the company as a long-term option.

In June of this year, Bradesco BBI already forecast that Gerdau could pay R$20 billion in dividends by 2023. But due to China’s economic difficulties, the geographic diversification of Gerdau’s revenue has improved this valuation.

Currently, 35% of the company’s revenue comes from its North American operations. “While there are recession concerns in the US, this exposure will be an asset given the uncertainty in Asia,” Toro Matos says.

For him, the short-term scenario is positive for the company, with demand for steel rebounding, due to the start of work expected in the $1.2 trillion infrastructure package approved by the US Congress in November.2021. The package marks a victory for President Joe Biden and expects to modernize the country’s ports, airports, roads and train lines, among other things.

The analyst designs a profit return 9% for Gerdao in 2022, with a target price of R$33.60. In his opinion, Gerdau is an option in the short term and Vale in the long term.

Nils Tahara, Head of Fundamental Analysis at Benndorf Research, prefers to have only Gerdau to pay dividends and recommends moving on from Vale. According to him, while Gerdau has the potential to generate a return of 15% in the next 12 months, profit return Vale must drop to 12% or less.

Tahara highlights Jirdao’s “fantastic” quarterly results and comfortable debt of R$12 billion. For him, good dividends are guaranteed at least until 2024, when a reversal occurs due to the end of the commodity boom cycle.

Therefore, he sees that the investment in Gerdau is done on schedule, and takes advantage of the positive scenario, but it will not be a long-term strategy. He recommends buying the GGBR4 with a target price of R$40.

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• 10 stocks considered cheap distribute dividends above the exchange rate 13.75% annually

• “Crescidendos”: 9 companies that pay dividends every year and exceed inflation

• ‘Snowball Effect?’ Louise Barsi and Thiago Reese tell how they choose stocks to earn through dividends

Cozulino, of Levante, loves Gerdau as much as he loves Vale, and prefers complementary strategies. It is reported that Gerdau has a well-defined dividend policy, with a will be spent (Part of net income earmarked for the payment of dividends) Not less than 30% of adjusted net income. Since 2018, will be spent of Gerdau above 33%. In the second quarter it was 30%,” he says.

The analyst highlights Gerdau’s share buyback program, which began in May, and which as of the second quarter was 32% complete. “There is still room for profit growth through the decline in free float (shares in free circulation).

What does the distribution history of VALE3 and GGBR4 say

Looking at the dividend history of mineral commodities companies, Fábio Sobreira, CNPI-P analyst at Ivest Consultoria de Investimentos, assesses that Vale and Gerdau are currently offering an “exaggerated” dividend yield, because it is well above recent years’ averages.

He explains that the so-called “profit power” of these companies – the ability to pay a dividend if the company distributes 100% of its profits – would currently be 38.84% for Gerdau and 31.03% for Vale. At first glance, the numbers suggest that both companies will be potential major distributors of dividends in the next 12 months, he points out.

However, the reality would be different if the average distributions of the past ten years were observed, adjusted for inflation, and adjusted for the sector’s real growth rate of 12%, in addition to current stock prices.

In this case, the “profit power” will drop to 10.77% for Gerdau and 8.89% for Phil. Given that companies do not distribute all their profits to shareholders, but at a rate of 50%, a profit return The most realistic for the next 12 months would be 5.38% for Gerdau and 4.45% for Phil, Sobrira estimates.

This is in contrast to these companies’ dividend yield in the past 12 months, through August 24, which was 14.12% for Gerdau and 22.61% for Vale.

For Sobreira, shares of these companies may be discounted specifically for this reason. “The market is penalized by uncertainty, and perhaps because of that, the good numbers on display may be just illusions,” he adds.

Given the number of other companies in the sector in the past 10 years, only CSN (CSNA3) will be able to offer profit return 12% over the next 12 months, in Sobreira’s assessment, given her proven track record. But in the view of other analysts, neither CSN nor Usiminas are suitable for dividend strategies at the moment. For them, CSN Mineração (CMIN3) can make good profits in the short and medium term, but there are uncertainties, such as dependence on China and the lack of a well-defined distribution policy.

a job current gain strength Profit strength in 2023* 12 month DY design** DY current
CSN Mining (CMIN3) 14.21% 7.20% 3.60% 13.96%
CSN (CSNA3) 16.11% 24.00% 12.00% 5.52%
Gerdau (GGBR4) 38.84% 10.77% 5.38% 14.12%
Usiminas (USIM5) 52.92% 10.75% 5.38% 20.64%
Voucher (VALE3) 31.03% 8.89% 4.45% 22.61%

Source: Fabio Sobreira study, Ivest Consultoria

Earning power: A company’s ability to pay dividends if it distributes 100% of its earnings

* Profit Strength 2023: takes into account the average distributions of the past 10 years, adjusted for inflation and adjusted for average real growth of the sector of 12%

Current DY: From August 24, 2021 to August 24, 2022

** 12-month forecast DY: Takes into account the average distributions over the past 10 years and the profit strength of 2023

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