Freeport-McMoRan (FCX): Little Dividend, Little Point?

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Top U.S. copper producer Freeport-McMoRan Inc (NYSE:FCX) just gave the announcement that no shareholder wants to hear.

Freeport-McMoRan FCX stock dividendFCX is slashing its dividend by 84% — a move to save cash as lower commodity prices have weighed on the company not just in copper mining, but also oil, gas and other mineral operations.

Freeport-McMoRan previously paid a dividend of 31 cents per share of FCX stock quarterly, yielding more than 6% prior to today’s announcement. The cut to just 5 cents quarterly pushed shares down fractionally Tuesday, though it’s arguable Wall Street already expected this move — after all, Freeport stock is now off by about 18% year-to-date, and down 40% over the past 52 weeks.

FCX management said the dividend cut was a way to shore up its balance sheet, following in the footsteps of its earlier-year announcement that the company would be cutting capital spending, as well. Freeport already has sold a number of assets: a copper-mine in Chile and a natural gas power plant in New Mexico, plus  it’s still looking for a buyer for another nat-gas plant in the state.

The cut is Freeport’s second hit to its dividend in 10 years; FCX stock also saw its dividend suspended at the height of the 2008-09 financial crisis. FCX is the third company to cut its dividend in 2015; Ensco plc (NYSE:ESV) and Diamond Offshore Drilling, Inc. (NYSE:DO) are the others, and just happen to be offshore oil and gas drilling services companies.

No surprise there.

The question from here naturally is: What’s next for FCX stock?

Freeport is getting the dividend cut out of the way to put FCX in a better financial position later down the road, simple as that. Management also stated it would return more capital to shareholders when market conditions turnaround. To Freeport’s credit, it did just that after suspending its dividend in 2008, resuming a 7.5-cent dividend in 2009 before ramping it up as much as 31 cents as of the last payout.

But this also is assuming market conditions and commodity prices recover significantly.

The big issue here is that Freeport-McMoRan is a little too diversified in its operations at the wrong-by-a-lot time. FCX gets 60% of its revenue from copper while getting 22% from oil and gas operations in the U.S. A more concentrated focus on copper actually would have served FCX well, as copper has only fallen 15% (trading between $2.45 and $3.26 per pound, currently at $2.76 per pound) vs. oil and gas, which has plummeted nearly 50%.

Bottom Line

In the investing world, we always tout the power of diversification, but occasionally in the business world, it can bite you.

Freeport’s relatively new exposure to the oil and gas industry (and thus oil prices) is what has caused FCX the most grief of late. Yes, conversely, it could lift FCX if fuel prices improve, but that could be a far-off possibility considering our current glut of oil and lack of spark for that to change.

Shareholders should pay close attention to FCX’s balance sheet and take note if the company continues selling operations. If Freeport can divest the oil and gas business, I would be more inclined to own FCX stock.

As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/freeport-mcmoran-fcx-stock-dividend-cut/.

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