Southern Copper Corporation (NYSE:SCCO) has announced that on 23rd of November, it will be paying a dividend of$0.50, which a reduction from last year’s comparable dividend. However, the dividend yield of 6.2% is still a decent boost to shareholder returns.
Southern Copper Doesn’t Earn Enough To Cover Its Payments
A big dividend yield for a few years doesn’t mean much if it can’t be sustained. Before making this announcement, the company’s dividend was higher than its profits, and made up 86% of cash flows. While the cash payout ratio isn’t necessarily a cause for concern, the company is probably focusing more on returning cash to shareholders than growing the business.
EPS is set to fall by 2.1% over the next 12 months. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 129%, which is definitely a bit high to be sustainable going forward.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2012, the annual payment back then was $2.46, compared to the most recent full-year payment of $3.00. This implies that the company grew its distributions at a yearly rate of about 2.0% over that duration. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company’s earnings are not consistent.
Southern Copper’s Dividend Might Lack Growth
With a relatively unstable dividend, it’s even more important to see if earnings per share is growing. We are encouraged to see that Southern Copper has grown earnings per share at 24% per year over the past five years. While EPS is growing rapidly, Southern Copper paid out a very high 110% of its income as dividends. If earnings continue to grow, this dividend may be sustainable, but we think a payout this high definitely bears watching.
The Dividend Could Prove To Be Unreliable
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. 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. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we’ve identified 2 warning signs for Southern Copper that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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