3 reasons this broker says the South32 (ASX:S32) share price is a buy

This mining giant’s shares could be in the buy zone…

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The South32 Ltd (ASX: S32) share price has been on fire this year.

Since the start of the year, the mining giant’s shares have risen an impressive 36%.

This is more than triple the return of the S&P/ASX 200 Index (ASX: XJO) over the same period.

Can the South32 share price go higher?

The good news is that it may not be too late to invest, with one leading broker tipping the South32 share price to keep rising.

According to a note out of Goldman Sachs this morning, the broker has retained its conviction buy rating and lifted its price target on its shares to $3.80.

Based on the current South32 share price of $3.41, this means potential upside of ~11% over the next 12 months.

In addition to this, the broker is forecasting some very generous dividends in the coming years.

Goldman has pencilled in dividends per share of 29 US cents in FY 2022 and 31.9 US cents in FY 2023. Based on current exchange rates and the latest South32 share price of $3.41, this will mean fully franked yields of 11.6% and 12.8%, respectively.

What did the broker say?

Goldman explained that there are three key reasons why it is bullish on the South32 share price.

It commented: “(1) Valuation: The stock is trading at 0.92x NAV (A$3.75/sh). (2) Strong FCF outlook: We forecast a FCF yield of c. 15-18% in FY22 & FY23 (over 20% at spot), driven mostly by higher base metal prices (combined c. 70% of FY22 EBITDA). Spot EBITDA is over US$3.8bn vs. our base case c. US$3.0bn estimate. (3) Increased capital returns: We assume the buyback continues to be extended (at US$250mn p.a) and S32 continues to pay out 70% of earnings (40% ordinary, 30% special dividend component). On our estimates, S32 is on a dividend yield of c. 12-13% in FY22 & FY23.”

Should you invest $1,000 in South32 right now?

Before you consider South32, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and South32 wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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