Check Out Southern Copper’s Low PEG Ratio, High Dividend Yield (SCCO, FCX)

In a weak market, dividends can make the whole difference between solid medium to long-term returns and stale stocks that waste your time, money, and opportunity cost. Today, Benzinga.com is on the search for stocks with large dividend yields (greater than 6%) that also have the cash flow and earnings growth the support current and even larger dividends over the next five years. Unexpectedly, Southern Copper SCCO jumps to the top of the list. This is an integrated copper producer with facilities in Peru, Mexico, and Chile; it mines for copper, zinc, silver, and molybdenum. The company grew by 99% the last year and is expected to grow a further 29.10% for each of the next five years. Earnings estimates have actually been on the rise this quarter as the price of the commodities it mines rise in value. The valuation looks attractive given the current multiple of 13x and the forward multiple of 10x; couple this with the 29.10% growth rate, you have a PEG ratio of only 0.34. That is seriously low. This compares to its nearest competitor’s, Freeport McMoran FCX, PEG ratio of 0.53 (also good). In addition to robust earnings growth, Southern Copper has a huge dividend, 6.30%; compare that with FCX’s 2.00% yield. SCCO has the cash flow to back up the dividend as well with huge gross margins. While their cash flow statements show a negative flow for 2009, this was due to the company buying back stock and reducing long-term debt, two things that are net positives. Insiders became strong buyers of SCCO’s stock last year as well as the stock depressed along with the overall market; the most recent purchase (112,000 shares) was bought in August, when SCCO was trading right at current levels. On a technical basis, Southern Copper is trading just off its recent lows near $26.50, which have been support for the stock for the past nine months. Solid fundamentals, good cash flow, a huge dividend, insider support, and a technical buy signal all make SCCO a great long candidate around these levels; note that the stock does report earnings on the 19th of July, though. Traders should consider getting long half a position in the stock and selling the September $30/25 strangle against it for $3.65 to take advantage of pre-earnings volatility. Max profits equal 18% over the holding period (yearly profit of over 100%) with a downside cost basis of $24.92, a discount to the current trade price of 12.54%. See Some of the Top Moving Indexes Here.