The best time to buy cyclical stocks are when a cycle is at lows. The problem is, buying at cyclical lows is also the most stressful time to buy. So you can see the irony here: the best time to buy for our pocketbook is the worse time to buy for our stress levels.
We can, however, overcome this emotional difficulty by focusing our minds on the bottom line. Teck Resources Ltd. (TSX:TECK.B)(NYSE:TECK) makes this easy. As a $16.5 billion diversified mining, smelting and refining giant with operations in Canada, the U.S., Chile and Peru, Teck is a force to be reckoned with.
Its major positions in different base metals markets and its 21% interest in Canada’s Fort Hills oil sands project are huge assets, and the firm is cranking out tons of cash flow today and will crank out tons more in the future.
We cannot escape the fact that Teck is a big coal producer (57% of EBITDA), which has certainly weighed on the stock as well. That said, we should take note of the fact that management is working hard at increasing its copper business, which is expected to result in coal composing approximately 45% of the company’s EBITDA in a few years.
Dividend increases are coming for Teck shareholders
A difficult commodity price environment notwithstanding, Teck continues to generate impressive amounts of free cash flow. In its latest quarter, Teck generated $1.6 billion in operating cash flow and $560 in free cash flow, adding to its already dramatically improving balance sheet and financial standing.
Earlier this year, the company received credit rating upgrades from four credit rating agencies. Among the upgrades was Moody’s Investor Service’s upgrade to a rating of Baa3 with a stable outlook and Fitch Ratings’ upgrade to a rating of BBB-, also with a stable outlook.
With these upgrades, the company is now investment grade, making it easier and less expensive for the company to access debt markets — and inspire investor confidence. We can expect these upgrades to go a long way in improving investor sentiment on the company and the stock.
As a result, Teck is in an attractive position and management has laid out its plans as the company focuses on returning cash to shareholders. The company’s new policy is to return at least 30% of available cash flow, over and above current dividend levels.
This paves the way for healthy dividend increases, which will push up the company’s dividend yield significantly from the current 1%.
Growth projects to significantly ramp up cash flows
Teck has its foot in the economic growth engines of the world, and with new projects coming on stream in the next few years, Teck’s position will be strengthened across the board. For example, the start of the Quebrada Blanca Phase 2 (QB2) mine in Chile will elevate Teck to one of the world’s major copper producers.
Teck’s QB2 copper mine is the company’s highest priority major growth project. As one of the world’s largest undeveloped copper resources, this mine has an initial life of 28 years with the potential for further growth. Construction on the mine was sanctioned in December 2018 and first copper production is planned for the fourth quarter of 2021.
This focus on copper is a good strategic move for Teck, as copper is one of the most versatile and durable base metals. It’s used extensively in the renewable energy industry and has a solid secular demand growth trend supporting its market fundamentals.
Foolish bottom line
I know it’s hard, but buying stocks when they’re trading at cyclical lows is one of the best ways to make money. This is true especially when the stock has some upcoming catalysts that will drive the market to take notice and start buying the shares. This article explains the many catalysts that Teck Resources has in its near-term future that make this stock a strong buy.
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 Karen Thomas has no position in any of the stocks mentioned.