Is Teck Resources' Dividend in Danger?

Strong cost performance and solid cash position mean there's no immediate risk for Teck Resources dividend.

Jun 18, 2014 at 1:01PM

With yield of just under 4%, Teck Resources (NYSE:TCK) is on the radar for many income-oriented investors. The company's two main sources of income are met coal and copper, and since both these materials are under pressure so is Teck Resources' business. In fact, the company's first-quarter earnings declined by almost 80% in comparison to the first quarter of 2013. Should investors worry about the dividend?

Cost advantage on met coal side
Despite the softness of met coal markets, the met coal segment was a source of a $114 million gross profit in the first quarter for Teck. The reason for this is Teck Resources' cost advantage over other met coal producers like Walter Energy (NASDAQOTH:WLTGQ) and Cliffs Natural Resources (NYSE:CLF). Interestingly, Cliffs Natural Resources yields even more than Teck Resources, despite the fact that the company produces met coal and iron ore, which are the two most pressured markets nowadays.

The fact that Cliffs Natural Resources' shares have lost almost half their value this year has led to a higher yield, as the dividend remained the same in cash terms. Yet, Cliffs Natural Resources' dividend could be on fire, as the company's cash flows are squeezed by the continuing market softness.

As for Walter Energy, the company almost eliminated its dividend back in 2013. Walter Energy left a symbolic dividend for the sake of those institutional investors, who could not invest in the company that does not pay dividends. Otherwise, sales from such investors would have put additional pressure on the beaten Walter Energy's shares.

Teck Resources cost performance on the met coal front remains an important long-term advantage for the company. While prices remain depressed, they are unlikely to dip significantly lower, as the current price level already forces many producers to curb their production.

Copper is a little bit more worrying
Copper is a source of bigger worry, as the metal could have more downside if negative news from China continues. Worries about the demand from the world's biggest copper consumer as well as investigations of the role of copper in the country's shadow banking schemes have already put pressure on the metal's price. Unfortunately for copper producers, further downside is still possible.

Copper brought $200 million of gross profit for Teck Resources in the second quarter. Second quarter average realized copper prices will likely be lower than first-quarter prices, thus pressuring the company's bottom line. Still, Teck Resources has enough of a safety cushion to protect its dividend.

First, the company remains profitable despite the tough market environment. Second, Teck Resources' cash position is big enough to absorb negative earnings fluctuations. With almost $2.4 billion of cash on hand at the end of the first quarter, Teck Resources could afford to burn cash for a number of quarters, waiting for the uptick in met coal or copper prices.

Bottom line
Currently, Teck Resources' dividend remains rock solid. In addition to the company's decent met coal and copper performance, Teck Resources benefits from its exposure to zinc, which is a much more stable market. That said, the attractive yield will continue to support the company's shares. 

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks 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.

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