The top gold mining company Barrick Gold (TSX:ABX)(NYSE:GOLD) stock has surged more than 60% in the last 12 months. However, even after a strong rally, the stock still seems to have a long way to go. Stable earnings and dividends, along with a solid outlook for the yellow metal ahead in 2020, make it an attractive pick for long-term investors.
Almost a zero-debt company
Barrick Gold is fast approaching becoming a zero net debt company. At the end of 2019, it had net debt of approximately $2 billion. Notably, the company had net debt of more than $10 billion in 2014. It has sold inefficient mines in the last few years and paid back the debt.
Based on the management’s estimates, Barrick Gold could be a zero-net-debt company in the next four to six quarters.
The improving debt profile will not only strengthen the balance sheet but will also expand profitability with lower debt-servicing costs.
Earnings and dividends
Barrick Gold is a low-cost producer and has a fleet of well-diversified mines. It aims to produce approximately five million ounces of gold in 2020. In the second half of 2019, the company’s earnings were uplifted by improved realized gold prices.
Importantly, gold prices have further rallied into Q1 2020, which will likely have the same impact on its upcoming earnings. Higher gold prices will expand gold miner’s margins as well. Barrick Gold has some of the best margins among peers.
Stable earnings and a strengthening balance sheet will likely improve payouts for Barrick Gold shareholders. It increased dividends by a handsome 40% last month. The stock is currently trading at a dividend yield of 1.5%, lower than that of broader markets. However, it offers a huge potential for a dividend increase in the next few years.
Upbeat gold prices
After the U.S.-China trade war, the coronavirus outbreak weighed on global financial markets. Notably, investors rush to the safe haven gold amid volatile broader markets to prevent capital loss. This has worked in favour of gold and gold miners in the last few months. Barrick Gold stock has exhibited a solid positive correlation with the yellow metal. Thus, rallying gold would probably mean a rally in Barrick Gold stock.
Interestingly, geopolitical tensions and the U.S. presidential elections later this year will further influence volatility in the broader markets. A healthy combination for gold and gold miner stocks.
Barrick Gold stock has more than tripled since its September 2015 levels. However, it is significantly lower against its $54 levels in 2011. From the valuation perspective, the stock looks a tad expensive. It is trading 26 times its expected earnings for the next 12 months. Notably, there are many gold mining stocks that are trading at premium valuations after a recent steep rally. Last week’s weakness was driven by coronavirus fears and lowered Barrick Gold stock by almost 12%.
Barrick Gold stock indeed looks strong and could continue its rally largely following physical gold prices. An interim weakness in the stock can’t be ruled out completely, which should be an opportunity for long-term investors. However, with reducing debt, upbeat earnings, and attractive dividends, I see more value in Barrick Gold stock.
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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 Vineet Kulkarni does not have any positions in the stocks mentioned.