The board of Southern Copper Corporation (NYSE:SCCO) has announced that the dividend on 22nd of November will be increased to $1.00, which will be 100% higher than last year's payment of $0.50 which covered the same period. This will take the annual payment to 5.0% of the stock price, which is above what most companies in the industry pay.
Southern Copper Is Paying Out More Than It Is Earning
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, Southern Copper's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 102% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.
The next 12 months is set to see EPS grow by 11.3%. If the dividend continues on its recent course, the payout ratio in 12 months could be 111%, which is a bit high and could start applying pressure to the balance sheet.
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2013, the dividend has gone from $0.68 total annually to $3.50. This means that it has been growing its distributions at 18% per annum over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.
Dividend Growth Could Be Constrained
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. It's encouraging to see that Southern Copper has been growing its earnings per share at 23% a year over the past five years. EPS is growing rapidly, although the company is also paying out a large portion of its profits as dividends. If earnings keep growing, the dividend may be sustainable, but generally we'd prefer to see a fast growing company reinvest in further growth.
Southern Copper's Dividend Doesn't Look Sustainable
In summary, while it's always good to see the dividend being raised, we don't think Southern Copper's payments are rock solid. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. Overall, we don't think this company has the makings of a good income stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Southern Copper has 3 warning signs (and 2 which are potentially serious) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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