Traditionally, the gold sector is not where investors rush when looking for dividend-paying stocks. Gold mining is capital intensive, and companies must continually reinvest in their businesses to ensure they remain profitable amid volatile gold prices. Consequently, many companies are uninterested in returning cash to shareholders.
Gold streaming and royalty companies such as Royal Gold and Franco-Nevada offer some of the higher yields among gold stocks, but for now, we'll limit ourselves to only those companies pulling the yellow stuff out of the ground. So let's dig in and look at some of the best opportunities.
Image source: Getty Images.
Come for the yield; stay for the longevity
Investors may initially be drawn to Agnico Eagle's stock because it offers one of the higher yields, but the more compelling factor should be its long commitment -- 35 consecutive years -- of returning cash to shareholders in the form of dividends. Payouts can rise and fall; in fact, they may disappear altogether in challenging times. Kinross Gold, for example, suspended its dividend in 2013 and has yet to reinstitute it. For investors, Agnico Eagle's history of returning cash to shareholders is worth its weight in gold.
Image source: Agnico Eagle Mines Ltd.
Based on management's outlook, Agnico seems well positioned to extend its streak of consecutive years paying a dividend. Targeting fiscal 2017 gold production of 1.55 million ounces, management expects production to rise to 2 million ounces in 2020. Moreover, it forecasts all-in sustaining costs (AISC) from $850 to $900 per gold ounce in fiscal 2017 (declining even further as production grows through 2020), providing an adequate margin to grow its cash position.
| Company | Market Cap | Fiscal 2016 Revenue | Dividend Yield |
|---|---|---|---|
| Agnico Eagle Mines Ltd. (AEM +4.78%) | $11.1 billion | $2.14 billion | 0.83% |
| Barrick Gold (ABX +3.15%) | $19.0 billion | $8.56 billion | 0.61% |
| Goldcorp (GG +0.00%) | $11.5 billion | $3.51 billion | 0.60% |
| Newmont Mining Corp. (NEM +4.22%) | $18.3 billion | $6.71 billion | 0.51% |
| Yamana Gold (AUY +0.00%) | $2.5 billion | $1.79 billion | 0.76% |
Data source: Morningstar.
The industry's big dog
The largest gold miner by market cap, Barrick Gold is a formidable force in the sector. Operating some of the largest gold-producing mines in the world, Barrick excels at keeping its expenses low. In fiscal 2016, Barrick -- the best performer in this peer group -- reported AISC of $730 per gold ounce. For context, the closest to Barrick here is Agnico, which reported AISC on a by-product basis of $824 per gold ounce in fiscal 2016. Excelling at keeping costs low, Barrick is able to generate significant cash. In fact, Barrick's free cash flow breakeven was below $1,000 per ounce in 2016 -- even if gold fell to $1,000 per ounce last year, Barrick would have still been churning out cash. In fiscal 2017, Barrick forecasts AISC between $720 and $770 per gold ounce and maintains a free cash flow breakeven of $1,000 per gold ounce.
Barrick's debt-reduction achievement further suggests it's well positioned to continue dividend distributions since it will save money on interest payments. In fiscal 2016, the company, simultaneously, reduced its debt by $2 billion and increased its dividend 50%. It plans to reduce its debt even further -- about $1.45 billion -- in fiscal 2017, maintaining a goal of bringing its total debt down to $5 billion by the end of fiscal 2018.
Digging into Goldcorp
Announcing an ambitious three-pronged, five-year plan last year, Goldcorp aims to grow gold production 20%, to grow gold reserves 20%, and to reduce AISC 20% by 2020. In addition to expansionary activities at Penasquito, Musselwhite, and Red Lake, Goldcorp foresees new operations at Coffee, Cerro Casale, and Caspiche as playing prominent roles in helping the company achieve its targets.
Controlling expenses, in any business, is important; however, it's critical for gold miners. Consequently, companies that excel at keeping costs low should be prime candidates for dividend investors, as they can grow cash flow and return it to shareholders. In Q1 2016, Goldcorp announced a $250 million target in "sustainable annual mine site and corporate efficiencies" that it sought to achieve by 2018. With more than 100% of that target identified, management is looking to identify even more efficiencies in 2019 and beyond.
Cranking out cash
Although its yield is nothing to write home about, Newmont Mining Corp. is a name that should be on one's watchlist. For what it lacks in a large yield, Newmont makes up for with cash flow. For example, it reported it has more than doubled its free cash flow over the past three years -- from $383 million in fiscal 2014 to $784 million in fiscal 2016. In fact, Newmont is the most adept among these peers at turning gold to green. According to Morningstar, the company converted 24.63% of its revenue to free cash flow in fiscal 2016. For context, Barrick is second best at 17.69%, while Goldcorp trails the group at only 3.11%.
Image source: Newmont Mining investor presentation.
Investors may also be attracted to Newmont's circumspect approach to its payout, for it maintains a dividend policy linked to the London Bullion Market Association's price of gold. When gold rises, so does the dividend. This affords great clarity and suggests that management has a good read on how much it can safely return to shareholders.
A gold stock for those with iron stomachs
Although Yamana Gold disappointed the Street last February when it announced its intent to forgo acquisitions in favor of organic growth, investors shouldn't disqualify it from consideration. According to a recent investor presentation, construction of Yamana's next cornerstone mine, Cerro Moro, is slightly ahead of schedule and remains on budget. Expected to commence operations in early 2018, Cerro Moro is forecast to produce 80,000 and 130,000 gold ounces in fiscal 2018 and 2019, respectively, averaging AISC below $600 per gold ounce.
Growing operational cash flow 26% from fiscal 2014 through fiscal 2016, Yamana is poised to increase it even further as Cerro Moro and expansionary projects at Chapada and Canadian Malartic come online.
AEM PS Ratio (TTM) data by YCharts
Trading less than 1.4 times sales and 4.2 times cash from operations per share, Yamana Gold -- thanks to the current bearish sentiment -- now provides an excellent entry point for long-term investors who are willing to withstand some volatility.
