Southern Copper: Dividend Dynamo or Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Southern Copper (NYSE: SCCO  ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Southern Copper yields 7.3% -- rather high and worthy of closer examination.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends to the amount it generates. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford.

Southern Copper's payout ratio is an aggressive 93%, though its free cash flow payout ratio is a more reasonable 61%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Let's examine how Southern Copper stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage Ratio

Southern Copper

70%

       15

Freeport-McMoRan (NYSE: FCX  )

30%

       24

Newmont Mining (NYSE: NEM  )

27%

       16

Teck Resources (NYSE: TCK  )

29%

        7

Source: Capital IQ, a division of Standard & Poor's.

Southern Copper's debt burden appears higher than its peers, though the absolute level is moderate.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Over the past five years, Southern Copper's earnings per share have grown 3% annually, while its dividend has grown at 7%.

The Foolish bottom line
Southern Copper exhibits a fairly clean dividend bill of health. Its payout ratio appears somewhat aggressive, however, so maintaining or growing those payouts will depend on the company's ability to expand production and the prices of its commodities can fetch.

To stay up-to-speed on the top news and analysis on Southern Copper, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any company mentioned. 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..


Read/Post Comments (3) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 15, 2011, at 7:31 PM, rfaramir wrote:

    How much of this analysis would change depending on whether the dividends were American-style versus European-style? I'm under the impression that American companies set dividends as a fixed dollar amount per period (usually quarterly), while European companies fix them at a percentage of earnings (and pay them at less predictable intervals).

    Where would I look to find if this South American company operated American-style or European? (I'm assuming American since it's listed on the NYSE and doesn't appear to be an ADR, but I'm not certain.)

  • Report this Comment On June 16, 2011, at 5:40 PM, skypilot2005 wrote:

    On June 15, 2011, at 7:31 PM, rfaramir above:

    Good question.

    Sky Pilot

    Ilan:

    Thanks, for the information. This stock is on my watch list.

    Sky Pilot

  • Report this Comment On July 01, 2011, at 8:35 AM, dwains wrote:

    I have held this stock for a while. One thing to be careful of - the payout on this stock will fluctuate. It goes up and down from quarter to quarter. The payouts are quarterly, but they fluctuate, usually with the commodity price of copper. So the the fact that they paid 56 cents this quarter may turn out to be 49 cents next quarter, and 63 cents the next. Just as long as you understand that going in its OK - just don't be surprised by it.

    When you have a stock that is tightly tied to a commodity this is to be expected.

    In general the payout is good, but I am holding the stock for other reasons. I think the world of hybrid cars is going to be huge with the general price of oil rising, and there is a lot of copper winding in those hybrid electric motors.

    Good Luck on your investing.

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