Cameco (NYSE:CCJ) produces and sells uranium. While there are a lot of question marks about Russian sanctions and their impact on this sector, I don’t believe that’s the main bull story.
In fact, I argue that Cameco is well-positioned to benefit from the change in sentiment in Europe when it comes to nuclear energy.
Having said that, Cameco is fairly leveraged. Thus its scope to dramatically increase its dividend beyond the 50% bump, and aggressively return more capital return to shareholders is limited.
Consequently, while there are some minuses to this investment, on balance, there are many good points and much to be excited about Cameco’s long-term prospects. Here’s why:
Revenue Growth Rates, Turning Higher?
After years of falling revenue growth rates, it now appears that for 2022, Cameco’s revenue growth rates are likely to inflict higher in 2022.
For investors, right now, there’s bound to be disbelief. For so long Cameco has been a poor investment, that everyone is price anchoring to its lower price point, that any upwards move in its share price is likely to be met by a rapid sale, as investors look to cash in a “quick profit”.
Why Cameco? Why Now?
Nuclear energy is now seen by Europe as a green source of energy. With the energy crisis hitting Europe, politicians have been quick to make an about-turn and clamor for nuclear energy as the key to solving their energy problems.
Nuclear power provides clean, reliable, and secure energy, and helps countries achieve their decarbonization goals.
This has led to uranium prices increasing by more than 85% over the trailing twelve months and show no indication of slowing down.
Discussing Cameco’s Dividend
Before getting Cameco’s dividend, let’s focus on its balance sheet. As of Q4 2021, off-balance-sheet, Cameco had approximately $1.6 billion in letters of credit outstanding. While Cameco does have roughly $1.3 billion in cash and equivalents, that’s offset by roughly $1 billion of debt.
Thus, altogether, Cameco is slightly leveraged, with net debt of $1.3 billion. It’s not a large detraction from the bull thesis, but it is something to consider.
During the earnings call, Cameco’s management said,
And with our new strategy, our continuing discipline strategy, we are going to be adding both earnings and cash flow. So, you are right, the question is a good one, that capital allocation, I can tell you, our Board has spent a lot of time thinking about this. Grant and his team, [are] obviously responsible for it. So, the decision taken this quarter was to increase 50% increase to the dividends clearly sustainable for us, and no new decisions from there.
Therefore, it could be said that Cameco is working towards sustained long-term dividends, rather than rapidly increasing its dividend, only to later have to retrace its dividend.
For perspective, in 2021, Cameco’s dividend outlay was approximately $32 million. And now, for 2022, its dividend has increased by 50%, meaning that its dividend would reach close to $50 million.
For a business that’s valued at approximately a $12 billion market cap, this increased dividend is still going to be less than 1% to shareholders.
Thus, not exactly something to get one’s heart racing.
CCJ Stock Valuation – Interesting Price Point
Now, let’s shine a spotlight on its cash flow potential.
Realistically, I believe that in the coming weeks, analysts will upwards revise their financial model and expectations of Cameco’s free cash flow potential.
That’s a really nice spot to be for shareholders. Nothing beats owning a company’s stock and watching analysts upwards revising their price targets of a stock that you own.
But on the other hand, even if management talked on the earnings call that for 2022 Cameco is “anticipating significant improvements to cash flow and earnings”, I’m struggling to see that it’s worthwhile paying more than 40x its 2023 estimated earnings.
Even if the price of uranium continues its march above its 11-year high, I don’t see how Cameco’s cash flow can dramatically improve and make its valuation look extremely enticing.
The Bottom Line
Investors interested in playing the “nuclear theme” are making a long-term bet that sustained demand for nuclear allows Cameco to meaningfully strengthen its balance sheet, as well as put the business on a path to go beyond deploying capital into maintenance and growth projects, with the goal of returning large amounts of capital to shareholders.
What’s more, given the positive tailwinds facing this company, investors are not asked to pay a large multiple for a “story-stock”. Thus, I’m certainly putting this stock on my watchlist and will circle back as events continue to unfold. Whatever you decide, good luck and happy investing.