Shares in Bluescope Steel Limited (ASX: BSL) are performing well lately and have charged 5% into the green over the past month.
On the last check, the Bluscope share price was fetching $20.56 apiece, having finished less than 1% in the red on Thursday.
As commodity baskets soared to record highs in 2021, Aussie miners have been returning cash to shareholders in droves by way of dividends and/or share buybacks.
Analysts at JP Morgan are constructive on Bluescope and reckon FY22 could be a year that sees considerable total shareholder return for those patient enough to stick with the company.
Still generating mammoth free cash flow
JP Morgan analysts note that steel prices have begun to catch up to input costs, with coking coal up around 60% at the time of its report whilst pig iron and iron ore were up 33% and 10% respectively.
The impulse caught up to steel prices in the US and Europe after a delayed response, with steel rebar climbing around 5% in the past month and over 18% since November.
This gain should feed cash down through Bluescope's P&L, JP Morgan says, resulting in huge amounts of free cash flow (FCF) generation that could be redistributed back to shareholders.
"Despite declining from recent highs, spot spreads are still generating a strong 18% FCF yield for BSL from FY23 onwards, and spot earnings are still within the BBG consensus range," it said.
"This highlights that despite strong cost inflation, BSL remainshighly FCF generative".
FCF yield is a ratio that highlights a company's ability to meet its financial obligations, but also its ability to support dividend growth, and other capital budgeting decisions.
The higher the yield, the greater prospect for Bluescope to reward its shareholders with a consistent stream of income via dividends.
In fact, that's one thing JP Morgan likes in Bluescope's investment debate – the fact it has "a shareholder return focus" in its mantra.
The steel giant is one of the broker's favourite picks in FY22, backed by robust fundamentals and high prospects for outsized return.
"We continue to rate BSL as one of our preferred stocks under coverage, based on its valuation support, growth outlook, ongoing capital management, balance sheet strength, and backdrop of strong demand conditions," it mentioned.
"Over time, we expect the company to grow domestic volumes in Australia, which should improve margins, while the North Star expansion also offers potential growth".
With the prospects of a FCF yield in the high teens for FY22, JP Morgan projects Bluescope to deliver a dividend of 50 cents per share, followed by another 50 cent payment in FY23 and then again in FY24.
It also values the company at $25 per share whilst urging its clients to buy up shares at the current prices. Currently, the Bluescope share price is trading below the consensus valuation of $23.50, a spread of roughly $3 per share at the time of writing.
Bluescope share price snapshot
In the last 12 months, the Bluescope share price has climbed 10%, but it has slipped into the red since trading restarted in January.
During the previous month of trade, shares have picked back up and are now trading 5% in the green.
