The S&P/ASX 200 Index (ASX: XJO) is full of a number of ASX shares that pay dividends. But, could Alumina Limited (ASX: AWC) shares be a choice for income?
This business' sole investment is 40% of Alcoa World Alumina and Chemicals (AWAC). The remaining 60% is owned by Alcoa, the manager and day-to-day operator of AWAC's global operations.
AWAC is reportedly the world's largest producer of alumina (which is the feedstock for producing aluminium) and also the world's largest bauxite miner.
The business says that there are potential expansion opportunities for the Australian and Brazilian refineries.
It says that part of the growth strategy is to have varied expansion options available across the AWAC global network. This provides the "flexibility to meet the growing demand for alumina and aluminium."
Is the Alumina share price worth buying (for income)?
Using the estimates on CommSec, the business is expected to pay an annual dividend of 7.3 cents per share in FY22.
If it does pay that dividend, then it would have a grossed-up dividend yield of 7.2%.
However, the business is then expected to pay a dividend per share of 5.3 cents per share in FY23. This would be a grossed-up dividend yield of 5.2%.
So, while a smaller dividend is expected, the dividends over two years may be solid.
In FY24, which is quite a while away, the business is predicted to pay a dividend of 11.5 cents. This would be a large grossed-up dividend yield of 11.3%.
I'm not an expert on the commodity alumina, so let's have a look at what some fund managers think.
Wheelhouse Partners' Alastair MacLeod and Plato Investment Management's Don Hamson were talking to Livewire's Ally Selby in an episode of 'buy hold sell'.
When talking about the ASX 200 share Alumina, Hamson said:
It's a sell for us. We think it is a dividend trap being squeezed by higher costs. Obviously, we have inflation around the world, and alumina prices aren't going in the right direction, like a lot of other commodities. So they're getting it from both sides. So for us, it's a dividend trap, and you don't have to be there. We don't own it.
MacLeod also had a negative opinion on the business, saying:
I think for an income investor, it's a sell. I think there's a good chance that the next dividend doesn't come through. It's really getting squeezed by, as Don said, Spanish gas and alumina prices. They're in the wrong spot. So I think from an income perspective, it's a sell. However, from a total return perspective… it's got assets. Think of the replacement cost for a lot of these assets. It's trading at a significant discount. Through the cycle, from a sort of deep value perspective and total return, I think there may be an opportunity there. But look, in the short term, from an income perspective, it's a sell.
Foolish takeaway
So, there you have it. Alumina shares may pay decent dividends in the short term, but experts are warning about the ASX 200 share's earnings.
However, there may be a chance of good earnings and dividends in FY24.
