Today I’m adding shares of Alcoa (AA) to my Jubak Picks Portfolio. At 3:10 p.m. today, February 18, the shares were up 2.01% on the day. My target price for the shares is $93.
The pick is a short-term hedge against sanctions against Russia if the Ukraine/Russia conflict escalates further. Russia supplies 6% of the world’s aluminum and I’d expect European and U.S. sanctions to hit those exports.
The pick is longer term bet on the continued rise in demand for aluminum and a continued and growing shortage of supply. (And improvements in the balance sheet at Alcoa.)
Aluminum is trading at multi-year highs on a rise in demand–car makers continue to add to their use of aluminum to reduce the weight of vehicles and to increase energy efficiency) and a shortage of supply. Producing aluminum is an incredibly energy intensive process and countries (such as China, the world’s leading producer) looking to cut their emissions of green-house gases have targeted the sector for energy savings. Cuts in electricity use by the sector are an especially appealing target in global climate change plans in countries (China again) where much of industrial electricity capacity consists of coal burning power plants.
I also like Alcoa right now because the company has made major progress on reducing its debt load and increasing cash flows. The company has made major pension fund contributions that have reduced pension unfunded liabilities to $1.285 billion at the end of 2021 from $2.236 billion at the end of 2020.
The company has been aggressive to using current low interest rates to roll over older high interest loans into new lower interest issues. Right now the company has no major debt maturities until 2027.
That has let the company restitute its stock buyback program and to pay its first even dividend. The dividend yield is a tiny 0.13% but it’s important as a sign of a company in the middle of a cash flow turnaround.
Alcoa is also the subject of today’s YouTube video QuickPick.
