Buying MT and selling AA

I was already buying MT. I increased my position significantly and I now hold 600 shares at $13.7 each. I also hold 200 stocks via options at strike $8 expiring Jan 2015. I paid $6.15 for each. This represents nearly 8% of my current portfolio.

As I discussed earlier, I have started selling AA. I sold everything except 200 options at strike $5 expiring Jan 2015 which I bought at $3.76 each. I will sell them in the next few months.

ArcelorMittal’s management has been making some mis-steps recently in terms of capital allocation. They paid $0.64 in dividend in fiscal year 2009, 2010, 2011 and 2012. This according to the share outstanding was worth around $1 bn  each year for a total of $4 bn. It is understandable because Laxmi Niwas Mittal’s daughter Vanisha Mittal Bhatia who sits on the BoD, his son Aditya Mittal (CFO) and he himself hold nearly 40% of the shares outstanding. The dividend is a good source of income for them.

The continuing pressure on steel and the debt load on MT has led to downgrade in the debt rating of MT. They have cut the dividend to $0.2 a year and have sold shares and convertible bonds to increase equity and reinforce the balance sheet. If they had not paid the dividends (tax inefficient) they might have been able to pay down the debt and the need to raise the capital would have vanished. A similar situation happened with Transocean – which I sold out recently.

I continue to hold ArcelorMittal because I believe that with Steel it is harder to make these decisions. It is not clear when the market will go up and when it will go down. It is hard to decide if one should pay dividend or preserve the cash to pay down debt instead.

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