Over the past year, it feels like there has been a shortage of everything. Global lockdowns and supply and demand imbalances have reminded the world how dependent it is on the real economy and commodities.
Prices of nickel, copper, iron, steel, and other base metals are up big over the last year, which is leading to rising input costs in just about every industry.
Rio Tinto (RIO -0.41%), Freeport-McMoRan (FCX -0.84%), and NextEra Energy (NEE -0.36%) are three dividend stocks that should do well even amid global raw material shortages. Here's why.
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A little of this, a little of that
Scott Levine (Rio Tinto): The current nickel shortage is certainly a story worth following, but by no means does it represent a reason why investors should be losing sleep at night. Mineral shortages are far from a rare occurrence, so metal-minded investors who are looking to reduce their risk should consider a mining company with a diverse portfolio of minerals -- a company like Rio Tinto.
Accounting for the lion's share of its top and bottom lines, iron ore is Rio Tinto's bread and butter. In 2021, for example, the company's iron ore sales represented 62% of revenue and 73% of underlying earnings before interest, taxes, depreciation, and amortization. But should the iron ore market experience a downturn, Rio Tinto's risk is mitigated considering its ample copper and aluminum businesses as well as the variety of other mineral interests it has, such as titanium dioxide, borates, diamonds, and lithium to name a few.
Another lustrous quality of Rio Tinto's portfolio is the fact that it operates in a variety of countries, reducing the risk of complications rising in any one nation. Whether it's a government's reluctance to issue the necessary permits -- as it recently experienced in Mongolia -- or geopolitical strife, or a variety of other factors, the fact that Rio Tinto is not overly reliant on its operations in any one nation helps to ensure the company's financial well-being will not suffer if its operations in an individual nation are compromised.
Lastly, Rio Tinto's sound financial health suggests that volatility in an individual mineral will not spell ruin for the mining company. The company has a formidable balance sheet, featuring a net cash position of $1.6 billion as of the most recently completed quarter.
Profit from the uncertainty
Lee Samaha (Freeport-McMoRan): There's no shortage of uncertainty in the global economy right now, which translates into uncertainty in the stock market. Nobody knows when the conflict in Ukraine will end, and that means questions as to when the upward pressure on many commodity prices will end.
It's not just a question of commodity prices that Russia and Ukraine export, like fertilizer, precious metals, wheat, oil, and gas. For example, Ukraine is also a major supplier of copper wiring to the automotive industry, and leading industry forecasters are already downgrading estimates for automotive production in 2022 and 2023.
These sorts of issues create significant disruptions to the functioning of the market, particularly around the question of what copper goes where in the supply chain. Everything points to upward pressure on copper prices, and the price is now back to the highs of October at around $4.70 per pound.
Aside from these issues, the long-term demand outlook remains positive due to copper's pivotal role in the clean energy transition. On the other side of the equation, the supply of copper could be constrained due to the difficulty of obtaining mining permits for environmental reasons and geopolitical risk around the regimes in major producing countries like Chile and Peru.
Fortunately, copper miner Freeport-McMoRan stands relatively well positioned in its production in the coming years and has production expansion opportunities in key assets in Indonesia and the U.S.
All told, copper and Freeport-McMoRan are excellent ways to buy some protection from the risk of soaring commodity prices in the economy.
A renewable energy investment built to last
Daniel Foelber (NextEra Energy): Raw material shortages have been a nightmare scenario for renewable energy and electric vehicle companies. As Lee mentioned, the automotive industry has been hit particularly hard due to its dependence on raw materials and commodities in the construction of chassis, as well as battery packs in the EV industry that depend on chips, lithium, and nickel.
Many renewable energy technology companies and operators were citing rising steel costs in 2021 as a primary concern. Today, the situation is just as bad if not worse, with widespread inflation pairing with higher nickel, copper, and lithium costs.
Nickel Price data by YCharts
It's a tough time to be an investor in the low-carbon future. And for that reason, an investment in a company that has a strong fossil fuel-related core business, but is also investing in decarbonization, seems to be the prudent approach. Few companies have a more compelling balance of stable earnings and long-term upside than the largest U.S. utility by market cap, NextEra Energy.
While its regulated electric utility peers spent decades depending on coal, nuclear energy, and natural gas, NextEra got a head start diversifying into solar energy, wind energy, and energy storage. Today, it's the largest producer of renewable energy in the U.S. with billions of new projects in the pipeline.
This established position gives NextEra an advantage over other utilities that are relatively new to renewable energy investment. Newer players are faced with a slew of challenges such as rising interest rates that reduce the return on investment, higher costs, and less experience.
Despite its investments in renewable energy, NextEra has a large existing natural gas business too. In 2020, its energy-owned net generation capacity in megawatts was 45% natural gas, 39% wind and solar, and 16% nuclear, oil, coal, and landfill gas.
Add it all up, and you get a diversified utility that also makes for an excellent dividend stock. NextEra Energy has a dividend yield of 1.9% and is committed to growing its earnings as well as its dividend.
