Wheaton Precious Metals (NYSE: WPM) has a unique dividend policy. Instead of paying a flat rate each quarter, the precious-metals streaming company pays out a percentage of cash flow. While that leads to some fluctuation in the payout, it's sustainable over the long term and can yield big-time growth when cash flow increases, making it a potential gold mine for income investors.
Digging into Wheaton's dividend policy
Last summer, Wheaton Precious Metals adjusted its dividend policy. Under the updated model, the company's quarterly dividend will be equal to 30% "of the average cash generated by operating activities in the previous four quarters divided by the company's then outstanding common shares, all rounded to the nearest cent." That's an increase from the 20% rate the company used in previous quarters.
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That higher percentage rate drove a 43% increase in the company's quarterly dividend in last year's second quarter. While it has fluctuated a bit since then, the revised policy could yield even bigger dividends in the future if cash flow increases:
Data source: Wheaton Precious Metals. Chart by author.
Two main factors could drive cash flow higher: improving precious-metal prices and higher volumes. While Wheaton Precious Metals can't do anything on the pricing side, it does have several options to boost output, which should drive cash flow higher (and take the dividend with it) even if silver and gold prices don't budge.
Optionality and additional upside
As things stand right now, Wheaton Precious Metals expects to produce an average about 355,000 ounces of gold and another 25 million ounces of silver per year through 2021. While that forecast implies a double-digit decline in silver output from last year and flat gold production, it doesn't include the roughly 350,000 ounces of gold equivalent production the company's partners are working to bring online. This optionality alone represents 45% upside. One of those projects is Hudson Bay's (HBM 0.53%) Rosemont copper mine. Hudson Bay is still waiting on the final permits for the project so it can start construction, which would take three years and $1.9 billion to build. However, once complete it would supply Hudson Bay with lots of low-cost copper while giving Wheaton Precious Metals access to all the silver and gold -- estimated at 3 million ounces of silver and 15,000 ounces of gold each year -- thanks to a previous streaming agreement. That mine is one of several its partners could build in the coming years to potentially provide Wheaton with incremental cash flow.
In addition to those previously secured partner developments, Wheaton Precious Metals has the balance sheet and cash flow to continue acquiring new streams. At the end of last quarter, the company had about $99 million in cash and $770 million available to it under its revolving credit facility to invest in additional gold and silver streams. On top of that, the company holds about $150 million in shares of silver producer First Majestic Silver (AG) that it acquired as part of a new streaming agreement with that company earlier this year that helped facilitate First Majestic's purchase of a troubled miner. While Wheaton must hold those shares for six months, it could sell its First Majestic stock in the future and reinvest the proceeds into new streams. Finally, the company estimates that it will generate between $3 billion and $5 billion in cash flow through 2021 depending on precious metal prices, which gives it ample free cash after paying the dividend to invest in additional streams.
An abundance of upside potential if everything goes right
As a result of revising its dividend policy last year, Wheaton Precious Metals currently offers one of the highest dividend yields in the gold mining space at 1.8%. What's compelling about that plan is that it provides investors with more income potential since the dividend rises with cash flow, which could increase because of the embedded upside of its portfolio, acquisitions of new streams, and higher precious-metals prices. If all three come together, Wheaton Precious Metals' dividend could soar in the coming years, making it a potential gold mine for income investors.
