Is Mineral Resources Limited's (ASX:MIN) 2.6% Dividend Worth Your Time?
Could Mineral Resources Limited (ASX:MIN) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
A slim 2.6% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Mineral Resources could have potential. There are a few simple ways to reduce the risks of buying Mineral Resources for its dividend, and we'll go through these below.
Click the interactive chart for our full dividend analysis
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 9.8% of Mineral Resources's profits were paid out as dividends in the last 12 months. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, Mineral Resources paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
While the above analysis focuses on dividends relative to a company's earnings, we do note Mineral Resources's strong net cash position, which will let it pay larger dividends for a time, should it choose.
We update our data on Mineral Resources every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Mineral Resources's dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was AU$0.19 in 2010, compared to AU$0.44 last year. Dividends per share have grown at approximately 8.6% per year over this time. The dividends haven't grown at precisely 8.6% every year, but this is a useful way to average out the historical rate of growth.
Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. It's good to see Mineral Resources has been growing its earnings per share at 35% a year over the past five years. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively.
Conclusion
To summarise, shareholders should always check that Mineral Resources's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, the company has a conservative payout ratio, although we'd note that its cashflow in the past year was substantially lower than its reported profit. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Mineral Resources out there.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come accross 4 warning signs for Mineral Resources you should be aware of, and 2 of them can't be ignored.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
