Big Profits – Big Payout
The higher steel prices over the past quarter has sent profits skyward at Russel Metals Inc. Russel (RUS.TO) reported a near-tripling of quarterly profit, thanks mostly to the aforementioned higher steel prices as well as sales of its products to the oil and gas industry.
Net income was C$79 million ($76 million), or C$1.25 a basic share, in the three months ended June 30, the producer and distributor of metal products said. On a diluted basis, per-share profit was C$1.24.
That was up from C$29 million, or 47 Canadian cents a share, in the year-before period.
Although Russell didn’t raise it’s quarterly dividend, it did maintain the regular dividend of 45 Canadian cents a share and also announced a supplemental dividend of 5 Canadian cents per share, which it said was due to the company’s improved earnings level in the current cycle.
Just as an increase in a company’s dividend is viewed as a positive for the future prospects of the company, a failure to increase the dividend, especially in light of such a huge increase in earnings, may be seen as a lack of confidence by management that the company’s recent success will continue for the long term. Russell is in a cyclical business and as such, management may be forecasting an end to the current cycle.
Russell’s current dividend yield of 6.65% is higher than its 5-year average dividend yield of 5.0%, which makes it an attractive stock on a yield basis. The company has also been increasing its dividend to the tune of a 5-year 50% dividend growth rate.
One troublesome component for dividend growth investors may be that the company has historically paid out nearly 100% of earning to shareholders – leaving little to re-invest into the future of the organization.
Inside Russel Metals
Russel Metals is one of the largest metals distribution and processing companies in North America (based on revenues and tons sold). The company’s mandate is to provide customers with competitively priced, quality metal products along with timely delivery.
Russel Metals conducts its distribution business primarily in three segments:
Metals service centers – These centers purchase metal in large volumes from producers principally in North America, add value by providing a wide range of value added services, and distributes products to a broad base of approximately 18,000 end users through a network of 58 Canadian and 12 U.S. locations.
Energy tubular products – The business units distribute pipe, tube, valves and fittings, chiefly to the energy sector in Western Canada and the Western United States from 5 Canadian and 2 U.S. locations.
Steel distributors – On the distribution side, Russell imports foreign steel products into Canada and the United States for customers that include both steel mills and metals distribution companies. This business segment operates from Canada as Wirth Steel and from the U.S. as the Sunbelt Group and performs coil processing under Arrow Steel Processors.
The company is one of the few metals distribution companies in the world to operate a significant international trading operation in conjunction with service centers.
For an income investor looking for a solid dividend yield in an industry other than financials or Real Estate, Russell Metals may offer that diversification that you are looking for. However, if you are building a dividend growth portfolio for the future then you may want to place your money in a company that has a lower payout ratio with more room to grow.
Full Disclosure: The author does not own RUS.TO.