Alcoa's Future Is Shinier Than Its Dividend; Why You Should Bet on Both
Shares of Alcoa (AA) - Get Report , one of the world's largest aluminum producers, will trade ex-dividend Wednesday, November 4. To qualify for a dividend check, investors must own shares of the New York-based company on or before its ex-dividend date -- the day Alcoa finalizes its roster of the shareholders to whom it will send dividend payments.
Buying dividends in this manner -- a strategy that consists of buying stocks for the sole purpose of collecting a quarterly dividend and then selling the stock shortly after the cash payment is made -- can be lucrative. But to make money, the strategy requires excellent timing.
Alcoa pays a 3-cent quarterly dividend that yields 1.17% annually. The company will send its payout on November 25 to shareholders of record as of Friday, November 6. Right away, I will concede Alcoa's dividend yield is not breathtaking since it's almost one percentage point below than the 2% average yield paid out by companies in the S&P 500Index.
Nonetheless, even though its shares -- trading at around $9 -- are down some 43% in 2015 and more than 80% below its all-time high of $41.50, there are tons of reasons to own Alcoa now before it pays its dividend. Consider its 2016 earnings per share estimates, for instance. Projections of 65 cents a share would not only mark a 5% earnings growth above 2015 projections of 62 cents, this would put Alcoa back on track towards growth after 2015's earnings decline.
What's more, there's an implied 45% gain on the stock, based on Alcoa's average analyst 12-month price target of $13 -- $4 higher than current levels of around $9. And the stock is cheap, too. With shares trading at just 15 times forward earnings estimates, Alcoa stock is priced two points lower than the forward P/E of the S&P 500 index, implying less risk.
What's more, as a way to unlock value, Alcoa recently announced plans to split into two companies -- the value added business (aerospace/automotive) and upstream portfolio (aluminum). "We believe the announced split will achieve the long-term goal of unlocking significant value," said Sterne Agee CRT analyst Josh Sullivan. Accordingly, beyond the dividend, holding Alcoa for the long term would seem smart.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.