Up 9% in a month, this ASX 300 stock is my top pick for May

I think this ASX coal miner has plenty of tailwinds.

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As Warren Buffett said: "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down".

Following a correction in global markets these past few weeks, plenty of "quality merchandise" now presents itself. I have one ASX 300 stock in laser focus.

Coal player Yancoal Australia Ltd (ASX: YAL) is my top ASX 300 stock pick for May. It's been in the green lately, but at today's share price of $5.91 apiece, the miner is still trading 14.5% lower than its all-time high of $6.91 in September 2022. This suggests there could still be plenty of value for investors.

Here, I'll run through three tailwinds behind this ASX coal miner.

Strong demand for coal

Global coal demand is projected to grow from 2024 as major importers India and China extend their economic growth.

According to Trading Economics, China has announced plans to build an additional 70 gigawatts in coal capacity this year. It also built 47 gigawatts into its system last year.

For context, Australia generated 30.2 gigawatts of power in 2021, says the Department of Energy.

These policies spurred Trading Economics to forecast a coal price of $147 USD/metric tonne by FY 2025, 8% above the $136 USD/MT it trades now.

India also imported 25% more coal in 2023 vs 2022, tallying 1.23 billion tonnes by yearend. Around $495 million of this tonnage is set to be imported this year.

Subsequently, S&P Global has raised its outlook on coal pricing "as demand for Newcastle Australia thermal coal appears to be strengthening".

It expects demand from India to "pick up" and that China imports will spike "while there are tightened safety inspections in its main coal mining provinces".

All of this is excellent for Yancoal's sales and earnings growth.

Attractive dividend yield

If this ASX 300 stock were to pay its last annual dividend at the recent price of $5.70 a share, investors would receive a 12.2% yield.

This mammoth cash return is due to the record thermal coal prices seen throughout 2022 and 2023. The company passed these through as dividends to its shareholders.

However, this latest dividend is not out of sync with the last three to four years of payments.

If coal prices remain as high as they are tipped to, it's not unreasonable to expect a similar rate of dividends from Yancoal moving forward.

Commodity stocks are relatively 'cheap'

According to recent analysis by Crescat Capital macro strategist Tavi Costa, the "commodity-to-equity" ratio "remains at near historical lows". This measures the value of the GSCI Commodity Index against the value of the MSCI World Equity Index.

Because of this, Costa believes we are "still in the very early stages" of a commodity cycle, the kinds of which "often evolve over long-term trends".

"Conventional investment strategies are poised to undergo a significant restructuring, placing a prominent emphasis on investments in hard assets", Costa added. And by hard assets, he means mining.

Yancoal is indeed cheap by relative standards. It trades at a price-to-earnings ratio (P/E) of 4.16 times, meaning investors are paying $4.16 for every $1 of the company's earnings. In contrast, the P/E of the iShares Core S&P/ASX 200 ETF (ASX: IOZ) is 17.3 times at the time of writing.

If the S&P/ASX 200 is the benchmark, there could be relative value on the table.

On the one hand, you might pay 17.3 times P/E for the S&P/ASX 200 ETF to obtain a 3.6% yield, where "consensus is that ASX 200 earnings will drop by 3.7%" this year, according to the Australian Financial Review.

Or you could pay the 4.16 times P/E into a rising coal price for a likely greater than 12.2% dividend yield, given Yancoal's payout history and current share price. Interesting.

Motley Fool contributor Zach Bristow 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 Scott Phillips.

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