Dividend Investors: Don't Be Too Quick To Buy Southern Copper Corporation (NYSE:SCCO) For Its Upcoming Dividend
It looks like Southern Copper Corporation (NYSE:SCCO) is about to go ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Southern Copper's shares on or after the 8th of May will not receive the dividend, which will be paid on the 23rd of May.
The company's upcoming dividend is US$1.00 a share, following on from the last 12 months, when the company distributed a total of US$3.50 per share to shareholders. Calculating the last year's worth of payments shows that Southern Copper has a trailing yield of 4.6% on the current share price of $76.82. If you buy this business for its dividend, you should have an idea of whether Southern Copper's dividend is reliable and sustainable. So we need to investigate whether Southern Copper can afford its dividend, and if the dividend could grow.
View our latest analysis for Southern Copper
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Southern Copper paid out 101% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 124% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Cash is slightly more important than profit from a dividend perspective, but given Southern Copper's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Southern Copper has grown its earnings rapidly, up 30% a year for the past five years. Southern Copper's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Generally, when a company is growing this quickly and paying out all of its earnings as dividends, it can suggest either that the company is borrowing heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Southern Copper's dividend payments per share have declined at 0.6% per year on average over the past 10 years, which is uninspiring.
To Sum It Up
Is Southern Copper an attractive dividend stock, or better left on the shelf? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Although, if you're still interested in Southern Copper and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 3 warning signs for Southern Copper that we strongly recommend you have a look at before investing in the company.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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