Is Cameco Corporation's Dividend at Risk?

Image source: Cameco Corporation.

Cameco Corporation (CCJ -0.27%) has been working hard to deal with a weak uranium market. Although the commodity appears to have a bright future based on favorable supply/demand dynamics building in uranium, that doesn't make the current oversupply situation any easier. Essentially, Cameco is ensuring it survives the current downturn so it can reap the long-term benefits of increasing demand. The question for dividend-focused investors is whether or not the dividend will survive, too.   

One-trick pony

Cameco is the world's largest publicly traded uranium miner. If you think the outlook for uranium is good, it's one of the best pure-plays available. And there are real reasons to like the future, including material construction of nuclear power plants in emerging markets like China and India, where increasingly affluent populations are demanding access to reliable power.

Those two countries alone have 27 nuclear power plants under construction right now. In fact, Cameco believes that by 2025, there will be a uranium shortfall if there's no new mine development. But that's the future; today, there's too much of the stuff floating around, and uranium prices are in the doldrums. That helps explain why Cameco's earnings have been heading lower for three consecutive years, falling 7% between 2013 and 2014, and 17% year over year in 2015.   

Cameco says that new supply is needed to keep up with demand. Image source: Cameco Corporation.

Cameco, of course, hasn't been sitting still; it's been cutting back on spending. Last year, for example, it trimmed its capital spending plans by nearly 7% as the year progressed, with the intention of cutting another 10% off that tab this year. But by the second quarter, it had increased its savings goal for 2016 to a nearly 25% capital spending cut. It's also been working hard to keep its cash cost of producing uranium stable; it actually trimmed its production costs a bit this year.   

Dividend at risk?

Cameco is doing the right things, but is this downturn bad enough to take out the company's roughly 3.2% yielding dividend payment? Cameco had adjusted earnings, which pulls out certain one-time items, of 0.87 Canadian dollars per share last year. It paid a dividend of CA$0.40 a share (U.S. investors' actual dividend payment will vary based on exchange rates), leaving a lot of breathing room for the dividend. However, if you look at earnings without all of the adjustments, the numbers aren't quite as positive, since leaving in all the one-time items results in earnings of just CA$0.16 per share.   

This year hasn't been much better, with a loss of CA$0.16 through the first half on an adjusted basis. Leaving in one-time items resulted in a loss of CA$0.15 a share, actually a little better than the adjusted number. And yet the company continues to maintain its CA$0.40 per share yearly dividend. It's really quite reasonable to question the safety of that payment.   

Data source: Cameco financial reports.

Dividends don't come out of earnings, they come out of cash flow. That, however, doesn't lead to much better news. For example, the company's cash on hand has fallen from CA$565 million at the end of 2014 to CA$130 million at the end of the second quarter. Weak top and bottom line results and its capital spending plans have left it burning cash to support the business... and to continue paying the dividend.   

Watch the dividend

So far, Cameco has remained committed to paying its dividend, which is nice for dividend-focused investors. However, it can't continue to burn cash to support the dividend and its business. If uranium prices don't pick up, something will have to give. That could mean taking on more debt, where long-term debt stands at a reasonable 20% or so of the capital structure, or it could mean cutting the dividend to reduce the cash burn. In the end, after so many other miners have cut their dividends, there is a real risk that Cameco could follow suit. If you are a dividend investor, you should be paying close attention to Cameco's results right now.