Silver Wheaton (NYSE:SLW) has provided strong returns for quite a while, with the stock having returned to high levels during the 2012 summer and fall rally. My premium report on Silver Wheaton explains the silver streamer's business model and how it has produced massive profits during silver's bull run.
But, with the company's stock already pricing in near-certainty of future success, anything less than ideal results could threaten shareholder returns in the coming years. Let's take a look at three key areas that you should keep your eyes on as Silver Wheaton continues to grow.
1. Will Silver Wheaton keep getting lucrative deals?
Silver Wheaton has done an excellent job of bringing customers on board. From deals with mining giant Goldcorp (NYSE:GG) to niche deals with Primero Mining (NYSE:PPP) and most recently Hudbay Minerals (NYSE:HBM), Silver Wheaton doesn't discriminate based on size. Wherever the economics make sense, Silver Wheaton has been willing to go.
In particular, Silver Wheaton has identified miners that specialize in base metals as a huge target market. According to the company, 70% of silver production comes not from deliberately seeking silver but rather as a byproduct from mining for other metals. Gold mining companies also represent a market with growth potential, as many gold mines also produce silver.
If the company expects to meet its ambitious growth projections, it will need to keep building on its already impressive client base. The more deals it can do, especially in a business environment for silver mining in which analysts are pessimistic about silver prices being able to maintain current levels over the long run, the better Silver Wheaton will fare in the future.
2. Can Silver Wheaton's dividend continue to rise?
Historically, mining companies haven't been particularly attractive for dividend investors. Most miners would usually plow any profits back into either further developing existing mines or acquiring new projects.
Increasingly, though, companies in the mining industry have started paying dividends. In particular, Silver Wheaton's dividends are tied to operating cash flow, with the company targeting 20% of the previous quarter's cash flow to pay out to shareholders.
Until recently, dividends at Silver Wheaton had only gone up, starting in March 2011 at $0.03 per share and rising on two occasions to $0.10 per share in its August 2012 payment. Yet even at that level, the stock's dividend yield is only around 1%. The company prides itself on its dividend policy, arguing that it's both sustainable and reflective of its success. Moreover, with Silver Wheaton anticipating a big jump on production and remaining bullish on silver prices, operating cash flows appears to have nowhere to go but up.
The question looking forward is how quickly and by what means Silver Wheaton will adjust dividends going forward. In November, the company cut its dividend to $0.07 per share. The 20% of cash flow metric isn't written in stone, so if a further unexpected drop occurs, Silver Wheaton could merely pay a higher proportion of its cash flow to keep the payout stable. As long as the company has enough money to make strategic acquisitions and reward shareholders, then no one's likely to complain about the friendly dividend policy.
3. What impact will changing central bank policy have on Silver Wheaton?
Clearly, part of what has driven investor interest in silver over the past 10 years is growing skepticism about the ability of central banks around the world to manage monetary policy successfully. As it becomes clearer that central banks are seeking ways to keep their local currencies weak in order to spur growth, a series of what's becoming known as "competitive devaluations" appears to be taking place.
More pragmatically, rock-bottom interest rates in Europe, the U.S., and Japan make it cheap to borrow money for purposes of investing in silver and other precious metals. Historically, higher interest rates have enticed investors away from precious metals, because the opportunity cost of missing out on the income that fixed-income securities tied to prevailing interest rates becomes higher when rates rise. That in turn can push silver prices lower and cost Silver Wheaton on the bottom line.
On the other hand, Silver Wheaton could benefit from rising rates. Given its status as a provider of financing, miners facing higher borrowing costs should be willing to give Silver Wheaton better deals for much-needed cash when rates rise. Whether that's enough to offset the potential impact on silver remains to be seen, but it is definitely a strong argument for owning Silver Wheaton over raw bullion.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Primero Mining. 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.