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Is Alumina’s 10% dividend enough to put it in the buy basket?

While the S&P/ASX 200 (INDEXASX: XJO) has enjoyed its best start to the year and touched a new all-time high yesterday, the Alumina Limited (ASX: AWC) share price has gained just 6.76% so far this year.

So, what’s caused the Alumina share price to stagnate, and could its 10% dividend still put it in the buy basket this year?

What’s happened to the Alumina share price this year?

The Alumina share price has climbed 6.76% year-to-date (YTD), as the Resources sector as a whole has struggled to post consistent gains in the first 7 months of the year.

Overall, the Information Technology and Financials sectors have dragged the ASX 200 higher so far this year, led by the likes of Magellan Financial Group Ltd (ASX: MFG) and Appen Ltd (ASX: APX).

So, while Alumina has been far from the worst performing Metals and Mining stock so far this year, and indeed is doing well just to be in the black, the company’s share price has failed to post significant capital gains as it has done since 2015 or so.

The Alumina share price is up 121% since the start of 2016, when it was trading at just $1.07 per share based on low global alumina prices and operational uncertainty surrounding the group.

However, a subsequent rebound in the alumina market and a turnaround for the group’s upstream and downstream operations sent the Alumina share price soaring higher up until around October 2018.

Is the Alumina share price in the buy zone?

As at time of writing, the Alumina share price is $2.38 per share with a market cap of $6.8 billion and a price-to-earnings (P/E) ratio of 7.46 times earnings.

Given the average for the ASX 200 sits around the 16x earnings mark, that could make Alumina a compelling buy based on a relative value play.

However, even more compelling than the relative play is the company’s 10% per annum dividend yield, which has remained supported by the strong commodities environment over the last few years.

Should management maintain the company’s current payout ratio, I’d expect to see the Alumina share price at least hold or surge higher in the wake of the August reporting season while keeping an eye on signs of a turn in the alumina market in the company’s full-year results.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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