A while back, I was greatly disappointed when I discovered that Methanex (TSX:MX)(NASDAQ:MEOH) had risen to the lofty heights of around $100 a share. You see, I had previously held the stock at much lower levels only to make a trade and sell it at a slightly higher price. I missed out on the ride up and was disappointed by the fact that I had sold much too early. Its dividend and growth make it a great holding in a TFSA, so investors should get in while the value is there.
Well, thanks to the trade wars and concerns about a slowing global economy, Methanex has once again dropped significantly to a more tempting level. This company is very volatile, with the share price moving up and down to a significant degree. But the company itself is solid with an excellent business, solid balance sheet, and attractive dividend.
Methanex is the world’s largest supplier of methanol to global markets. Methanol is a clean-burning alternative fuel and an ingredient in many industrial and consumer products. As fellow Fool contributor Victoria Hetherington has recently written, the clear liquid chemical is used in products spanning multiple industries producing products such as foams, plastics, and a variety of pharmaceutical products. The fuel is also biodegradable — another bonus for environmentally focused individuals.
Since there are a number of factors affecting the company’s income, from exchange rates to global demand to the price of natural gas, Methanex tends to have lumpy earnings, with the previous quarter being an example of its reliance on the global economy. But the base business is strong, with the company generating significant earnings, even during rough patches.
The dividend growth from Methanex is worth taking into consideration. Since 2010, Methanex has increased its dividend each year. The result is a yield of over 4% at the current share price. The dividend is well covered with a payout ratio of about 30% of earnings. The company has maintained this payout ratio for several years, with earnings growth along with the payout. The latest 9% increase occurred in June of 2019.
Another attractive aspect of this stock is the fact that the share count has been coming down over the past few years. With each share the company purchases, the share you own becomes relatively more valuable. I certainly hope with the shares at this low level that management will put a portion of its free cash flow into share repurchases. From March to June of 2019, the company reported that it had repurchased 1,069,893 shares of the 3,863,298 authorized.
I frequently like to check into insider buying and selling, as it often makes sense to get a feel for what those who know the company best are thinking. Over the past several years, there has been a trend that is worth noticing. When the price hits somewhere between $30 to $50, insiders start buying. When it gets around $90 a share, the insiders start selling. Right now, there has been more insider buying than selling, adding support to the current level as an entry point.
This company is a volatile TFSA buy
Methanex has had its share of share surges and retreats, but the stock remains a good one. Over time, it has returned capital to shareholders through share buybacks and growing dividends. Its business is focused on the future, with the clean-burning biodegradable fuel offering an alternative to traditional fossil fuels. At the current share price, Methanex is a buy. I’ve been waiting for a while, since 2016, for the shares to pull back to this level so it’s time to get in.
The volatility in this stock makes it an amazing TFSA stock. Historically, Methanex has spiked on occasion, more than doubling in value at times. It could very likely hit $80 in the next couple of years. If it does, sell half and get your money back while holding the rest. You get to keep those gains tax-free while holding the rest for the dividend for the long term.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Kris Knutson owns shares of METHANEX CORP.