We’re all in the stock market intending to make money. However, with news and emotions causing erratic price movements, we sometimes forget that there are real people behind these businesses and that how well a stock does depends on its earnings.
A cheap price doesn’t imply value
Investors may be attracted to the cheap price of Barrick Gold Corp. (TSX:ABX)(NYSE:ABX). It costs only $9.50 per share, but is it really cheap? You might think that it is because it has fallen from 2011’s high of $54, an 82% drop. However, its earnings per share fell from $4.75 in 2011 to 79 cents in 2014, an 83% drop.
Barrick Gold is not a good business to own. Its earnings have fallen for four years in a row, including this year.
Look for consistent earnings for consistent dividends
If you’re looking for dividends, Barrick Gold is an even worse investment. It cut its dividend from 20 cents to five cents in 2013. Today, its quarterly dividend is 2.6 cents per share. So, the original dividend of 20 cents was cut 87% in total.
Of course, investors shouldn’t buy Barrick Gold for its dividend. The business performance is highly dependent on the prices of precious metals. Falling precious metal prices will cause its share price to fall. Lower earnings mean a falling stock price and slashed dividends.
If you’re looking for consistent dividends, look for consistent earnings first.
How should you invest in Barrick Gold?
Barrick Gold may be a good turnaround opportunity at some point, but it looks like it has further downside because its 2015 earnings are expected to fall further from 2014. Further, the gold miner’s S&P credit rating is BBB-, which is not very strong.
For whatever reason, if you really must buy its shares, here are several ways investors can play Barrick Gold:
- You could dollar-cost average in and wait for the ultimate turnaround when commodity prices pick up again.
- Wait for Barrick Gold to post positive earnings before buying. This way, you’ll likely lose the first leg up, but at least you won’t be stuck in a losing business for an extended period of time.
- Look at Barrick Gold’s technical chart and trade on the ups and downs. By the way, I wouldn’t call that investing, but trading.
Conclusion
I like to buy businesses for the long term. There are so many good businesses out there. Do you really need to risk your hard-earned money with Barrick Gold? After all, you’re buying a piece of the business when you buy shares in a stock.
