Is a Dividend Cut Reason to Sell This Mining Stock?
Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If the eyes are the window into a person’s soul, then on a corporate level, we can say the same about dividends. Dividend payouts cannot be faked. Earnings can be massaged and managed from one quarter to the next, but dividends are almost always paid in real cash. A company can only maintain dividends without true earnings power for so long. Over the long term, dividends are a great way to truly assess the health of a business.
Moreover, changes in dividends over time are the best way for management to signal the likely future prosperity of their company. At the same time, dividend reductions are rarely received well. That’s exactly what’s happening with Newmont Mining (NYSE: NEM), which cut its payout while simultaneously reporting a massive loss.
In light of this, is now the time to ditch miners completely? Or does this signal the bottom for mining stocks?
Not all that glitters is gold
Newmont’s quarterly report was an ugly one. The market shouldn’t have been entirely surprised—it’s well known that gold prices plummeted over the past several months. For gold miners, this is a serious drag on profitability.
All told, Newmont posted a $2 billion second-quarter loss, due to the aforementioned collapse in gold prices as well as a significant impairment charge related to two of its Australian mines.
As if that weren’t bad enough, Newmont declared a $0.25 per-share dividend, down from its previous $0.35 per-share payout. That represents a 28% dividend cut.
Not surprisingly, Newmont is looking to scale back its operations as a result of the difficult marketplace. The company announced a plan to reduce its workforce by one-third. In all, cost-cuts have resulted in $362 million in savings year-to-date.
Newmont isn’t the only gold miner seeing its business dry up. Rival Goldcorp (NYSE: GG) also posted a $2 billion impairment charge in its most recent earnings report. Overall, Goldcorp’s earnings per share shrank by nearly two-thirds, year over year.
Once again, Goldcorp has set its sights on cost-cuts while it tries to right the ship. The company is targeting a 10% reduction in general & administrative expenses for full-year 2013.
An industry leader to consider
Newmont and Goldcorp are heavily dependent on gold prices for profitability. Gold prices have plummeted in recent months, and whether there’s further room to fall for the precious metal is impossible to predict with any certainty.
As a result, investors interested in mining stocks would be wise to consider companies with more diversified operations. Newmont and Goldcorp technically have operations in other metals, but the lion’s share of their sales and profits comes from gold.
That’s why I’d point investors to Freeport McMoRan Copper & Gold (NYSE: FCX), which has not been as severely punished as its competitors from the collapse in gold prices.
Freeport is obviously engaged in copper and gold, but also has significant oil and gas resources. This is due to the company’s $19 billion spending spree, acquiring both Plains Exploration and McMoRan Exploration in recent months.
The company’s earnings held up relatively well considering the beating most miners have taken recently. Net income per share declined 25% over the first six months of 2013 as opposed to the same period in 2012. That’s certainly disappointing, but not at all unexpected and not as bad as its competitors.
Moreover, Freeport’s dividend is holding steady, which provides strong downside protection for wary investors. Freeport’s declining share price has pushed its yield to 4.5% annualized, which means investors are being paid handsomely to wait for a rebound.
The fact that Freeport’s dividend is holding up is a great sign that management sees light at the end of the tunnel. Freeport's mineral operations are more evenly split between gold and copper. In addition, the company’s acquisitions mean this is a diversified business and an impending natural resource powerhouse. For Foolish investors interested in mining stocks, Freeport should be where your research begins.
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Robert Ciura has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!