If I had to buy just one FTSE 250 stock for my portfolio today, I’d acquire gold miner Centamin (LSE: CEY).
I’d choose this business over all the other companies in the index because I think it looks cheap. The firm also has a strong balance sheet, healthy cash flows, attractive dividend yield and should generate rising profits from the increasing gold price.
That said, this business might not be suitable for all investors. Commodity mining can be incredibly cyclical. The price of gold could crash tomorrow, which would eliminate a large chunk of Centamin’s profits. This would impair the group’s ability to pay a dividend, probably the most significant risk the enterprise faces.
Still, from an income and growth perspective, I believe this FTSE 205 company has excellent prospects.
Global outlook
I’m incredibly optimistic about the outlook for the UK and the global economy after the pandemic. Governments worldwide have acted quickly to stimulate economic activity, which could drive an economic expansion for years to come.
However, I’m also concerned about rising levels of global debt and the easy-money policies of central banks. As such, I’ve been looking to add a small amount of gold to my portfolio.
Gold has been a store of wealth for thousands of years. Indeed, the value of the yellow metal spiked last year as investors became concerned about the outlook for the global economy and rushed to a safe-haven investment.
I don’t think the world is heading for a financial disaster but, at the same time, I do want some exposure to gold in my portfolio. That’s why I’d buy FTSE 250 miner Centamin.
FTSE 250 bargain
I think this company offers the best of both worlds. It provides exposure to the gold price and the potential for earnings growth as management pursues initiatives to expand.
The miner produced just over 450,000 ounces of gold last year and is targeting output of as much as 500,000 ounces by 2024. This suggests that even if the gold price remains steady for the next three years, Centamin’s revenues and profits will still increase. If the gold price rises, the company’s earnings will see a double tailwind.
On the other hand, these growth plans do expose the company to significant risks. Mining projects can be expensive and often cost more than projected. There’s always going to be a chance Centamin may overstretch itself. The enterprise could jeopardise its future by taking on too much debt, or overspending on new mining projects.
As well as its growth potential, the stock is also a cash cow. The group ended 2020 with cash and liquid assets of $310m. It has no debt. This strong balance sheet allows Centamin to maintain a generous dividend. Analysts believe the stock’s dividend will hit 5.8% this year.
As well as this income, shares in the FTSE 250 miner seem cheap. The stock is trading at a 2022 price-to-earnings (P/E) multiple of 12.5. The market median is 16.5.
These are the compelling reasons why I’d buy Centamin for my portfolio today.
