Stock Analysis & Ideas

Newmont: Dividend Not Looking Sustainable

Newmont (NEM) is the world’s largest gold mining company. Headquartered in the United States, Newmont operates globally with exposure to a large breath of deep and open cast precious metals mines. I am neutral on the stock.

Dividend Analysis

Newmont’s management announced last week that it would be paying out a quarterly dividend per share of $0.55 on the 24th of March. This translates into a forward dividend yield of 3.3%, which seems lucrative considering we’re looking at a stock that has also appreciated by almost 17% in the past year.

Although matters are sound for Newmont from a retrospective vantage point, its dividend outlook remains questionable, and we can justify the claim by looking at the stock’s dividend safety ratios.

Newmont’s cash payout ratio is trading at a 1.04x premium relative to its five-year average. The payout premium wouldn’t have been of concern if the company had covered its dividends well, but Newmont’s coverage ratio of 1.24x is below the generally accepted standard of 2x and is also weaker than its historical average.

Furthermore, Newmont has generated a significant amount of cash due to surging metals prices over the past year. However, the metals and minerals price index has flatlined, barely gaining at all in the past six months, suggesting that the metals & mining sector’s golden days may be over for now.

Hefty Investment in Peruvian Gold

There’s usually a tradeoff between shareholder compensation and a company’s reinvestment rate, prompting me to analyze Newmont’s recent $400 million investment in South America’s largest goldmine.

Newmont has agreed to secure Buenaventura’s 43.65% interest in Minera Yanacocha for $300 million with an additional contingent payment of $100 million, tied to metal prices.

According to the company’s management team: “This acquisition gives Newmont control of the Yanacocha district where we are positioning the sulfides project for profitable production and value generation for decades to come,”

The stronghold that the investment will provide could benefit Newmont’s investors in the longer term, but it will most likely come at the cost of suppressed short-term compensation as the initial financial liability of the investment will need to be compensated for.

Wall Street’s Take

Turning to Wall Street, Newmont has a Hold consensus rating, based on two Buys and six Holds assigned in the past three months.

The average Newmont price target of $61.67 implies 1.9% downside potential in stock price.

Concluding Thoughts

Newmont’s dividend prospects are in serious doubt as its safety ratios are stretched. In addition, the mining giant has just made a hefty investment in South America, suppressing shareholder compensation prospects.

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