Alcoa (NYSE:AA) was long a bell weather for the stock market. Coming out first it helped set the tone. It was a minerals producer making a product which acted as a barometer to the health of the general market. But aluminum is a uber tough market. Alcoa is rebuilding but is still highly levered and not entirely out of the woods. My guess is it will hit earnings expectations dead on. It needs to keep investors believing.
Here is what Alcoa will show you. Some $8.3 Billion dollars in debt which has just be rated as junk. Institutions are sorry they ever circled this name. Interest rates are trending up. For every 1% increase in debt cost Alcoa spends $83 million in interest costs. Last calendar year Alcoa had some $236 million of net cash flow. 4% increase in debt cost will eat that up.
You know they’ll cut or cancel dividends before that. So dividend investors need to be very afraid if they haven’t become already. The stock is dropping. It will become a cheap option without expiry on the aluminium business. Eventually the industry will come back and the commodity will have pricing power. In the meantime you need to have a very strong stomach and not have specific plans this the money.
George Gutowski writes from a caveat emptor perspective.