The novel coronavirus triggered a complete pause in global economic activity, including key materials stocks. But, after a brief market meltdown, expansionary monetary policies supported equities.
Now, the real upside trigger for stocks is the gradual re-opening of economies globally. As the world gets back to work, there are several quality names in the materials industry that can deliver healthy returns.
There are several companies to invest in for the near-term as well as for the long-term portfolio:
With all of that in consideration, let’s discuss why each of these companies are stand out materials stocks to buy now.
Materials Stocks to Buy as the World Wakes Up: Rio Tinto (RIO)
As I write, China’s iron ore futures are trading at their highest levels since fiscal year 2013. With supply concerns from Brazil coupled with gradually increasing demand, materials stocks like Rio Tinto are likely to be in demand.
In fact, Rio stock has been trending higher after bottoming out in March 2020. I believe that the upside is likely to sustain for the diversified commodity producer.
From a fundamental perspective, there are ample reasons to like Rio Tinto. For FY2019, the company generated $9.2 billion in free cash flows. This allows the company to pay robust dividends with the current pay-out at $3.82 per share.
It’s also worth noting that for the current year, the company’s capital expenditure is planned at $5 to $6 billion. Even with the new virus-driven slowdown, investments are likely to remain robust. This will translate into incremental cash flows in the coming years.
China’s iron ore demand is likely to remain at healthy levels in the long-term. At the same time, the company stands to benefit from aluminium demand across North America.
Overall, Rio stock is trading at attractive levels and as industrial commodities trend higher, the company’s free cash flow will continue to swell. Income investors can also consider this materials stock, as its dividends will sustain and potentially increase in the coming years.
The Sherwin-Williams Company (SHW)
The Sherwin-Williams Company is a manufacturer and seller of paints, coatings and related products. The company is also among the few that have provided guidance for the year amid the coronavirus-driven crisis. The company’s exposure to the do-it-yourself market and exterior contractors is likely to be positive even during the crisis.
With an annual dividend of $5.36 per share, SHW stock is attractive for income investors. Further, with a cash buffer of $2.5 billion and leverage of 3.1, the company is well positioned to navigate the challenging times.
Estimates suggest that the global market for paints and coatings is expected to grow at a CAGR of 4.5% between FY2020 and FY2025. Sherwin-Williams is well positioned to benefit from this steady growth trend. This should translate into cash flow and dividend growth in the coming years.
It’s also worth noting that Sherwin-Williams has presence in China, Europe and North America. While the coronavirus pandemic has impacted growth, these regions can trigger long-term earnings and cash flow upside.
LyondellBasell Industries (LYB)
LyondellBasell is among the largest plastics, chemicals and refining companies in the world. Recently, Deutsche Bank upgraded LYB stock with an improved outlook for the U.S. polyethylene market. This is likely to translate into “expanded integrated margins and upward earnings revisions.”
Another reason to like LyondellBasell from a long-term perspective is the company’s global presence. With leadership position in polypropylene compounds, the company is expected to benefit from growth in emerging markets.
From a cash flow perspective, the company reported operating cash flow of $5 billion for FY2019. Robust cash flow will allow the company to pay healthy dividends and deleverage. The company’s current annual dividend pay-out is $4.20, which is likely to increase in the coming years.
With an investment grade rating, I don’t see any balance sheet stress for the company. On the contrary, the company plans selective merger and acquisition. This can be potentially pursued with incremental debt. Possible inorganic growth can also trigger earnings upside and positive stock momentum.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
