This FTSE 100 stock has quality, value, momentum and a 6%+ dividend yield

Is this FTSE 100 (INDEXFTSE: UKX) stock as attractive as it seems?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

On paper, steel and coal producer EVRAZ (LSE: EVR) looks attractive. Quality indicators seem to be robust with the firm’s percentage return on capital running in the mid-20s and the operating margin a little over 18%. At today’s 555p share price, value indicators show the forward price-to-earnings ratio for 2018 at a little under seven and the forward dividend yield just above 8%. Meanwhile, the stock has moved up a long way since its lows during early 2016, indicating strong momentum. But can all this positivity endure?

It’s mostly about steel

EVRAZ describes itself as “a vertically integrated steel, mining and vanadium business with operations in the Russian Federation, USA, Canada, Czech Republic, Italy and Kazakhstan.” Today’s half-year report reveals that during the first six months of 2018 the firm generated around 78% of its revenue from steel production, 18% from coal and 4% from other operations, so what the company earns from steel will have a big impact on the financial results. Some 36% of overall revenue came from Russia during the period, 22% from the Americas, 21% from Asia and 21% from the rest of the world including Europe. The market for products from Evraz has grown far beyond the firm’s Russian origins.

As well as mining the iron ore and making steel from it, Evraz turns out products for the construction and infrastructure market such as those used to erect buildings and bridges, and is one of world’s largest producers of rails and wheels for trains. The figures in today’s report are good with free cash flow up more than 20% compared to a year ago, consolidated earnings before interest, tax, depreciation and amortisation (EBITDA) more than 65% higher and net debt down 2.5% to $3.9m. This left the net debt-to-EBITDA ratio at 1.1, which the company reckons is below its target.

Market prices set to decline

Chief executive Alexander Frolov said in today’s report that the good outcome in the period was supported by the ongoing improvement in the global steel market environment.” However, I think that is the main consideration when investing in EVRAZ. Commodity prices are out of the firm’s control, which makes the company highly cyclical. I certainly wouldn’t be looking at EVRAZ today and weighing it up as a dividend-led investment. City analysts following the firm expect the overall level of dividend payments to fall during 2019. That’s not surprising because the company said in its 2018 year-end outlook statement that it expects market prices to decline in the second half, particularly international coal and steel benchmarks.”

Generally though, the directors seem relaxed about the outlook and said the overall financial performance should “remain solid”  because of the pipeline of internal improvements and a strong pricing environment “relative to the average levels seen in the last three years.” However, I reckon the huge rise we’ve seen in the share price since 2016 increases the risk of investing in EVRAZ now, despite the firm’s tasty-looking quality, value and momentum indicators, so I’m looking elsewhere for a home for my capital.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »