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Southern Copper Corporation (NYSE:SCCO) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 10th of May will not receive this dividend, which will be paid on the 25th of May.
Southern Copper's next dividend payment will be US$0.70 per share, on the back of last year when the company paid a total of US$2.80 to shareholders. Last year's total dividend payments show that Southern Copper has a trailing yield of 4.0% on the current share price of $69.64. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Southern Copper paid out more than half (62%) of its earnings last year, which is a regular payout ratio for most companies. 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. Dividends consumed 56% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Southern Copper's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Southern Copper has grown its earnings rapidly, up 24% a year for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Southern Copper could have strong prospects for future increases to the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Southern Copper has lifted its dividend by approximately 5.2% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
To Sum It Up
Is Southern Copper an attractive dividend stock, or better left on the shelf? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Southern Copper's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 62% and 56% respectively. In summary, it's hard to get excited about Southern Copper from a dividend perspective.
While it's tempting to invest in Southern Copper for the dividends alone, you should always be mindful of the risks involved. Be aware that Southern Copper is showing 4 warning signs in our investment analysis, and 1 of those is significant...
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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. 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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