Will Silver Wheaton Corp. Raise Its Dividend in 2016?

Image source: Silver Wheaton.

The mining industry hasn't historically been known for being a good source of dividends for investors, with most mining operations choosing instead to plow any free cash flow back into their operations. Yet for Silver Wheaton (SLW +2.80%), the business of providing financing to its mining-company partners gives it streams of production from those mines. When precious metals were soaring, Silver Wheaton shared its newfound wealth with shareholders in the form of dividends.

Now that silver and gold have plunged from their highs of a few years ago, the precious metals streamer's dividends have fallen sharply. Long-term investors remain hopeful that a rebound in gold and silver will help Silver Wheaton turn the tide. Let's look more closely at Silver Wheaton to see which way its dividends are likely to go in 2016.

Dividend stats on Silver Wheaton

Data source: Yahoo! Finance. Last increase refers to ex-dividend date.

What drives Silver Wheaton's dividends?
Most companies have a rather haphazard way of defining how much they'll pay in dividends. Past dividend payments play a more important role than current financial results, and when industry conditions deteriorate, that can lead to a catastrophic dividend cut as companies wait as long as possible to break the bad news to shareholders.

Silver Wheaton, on the other hand, has established a quite clear-cut method for determining its dividends. The board of directors has a stated dividend policy in which the company pays out an amount equal to 20% of the average operating cash flow over the past four quarters. The target dividend therefore adjusts to changing conditions gradually and in a way that never puts undue strain on Silver Wheaton's financial condition.

SLW Dividend data by YCharts.

Because Silver Wheaton's business model involves taking streams of gold and silver production in exchange for financing, its cash flow is highly dependent on bullion prices. That has been a disaster for the company in recent years, as the iShares Silver Trust (SLV +1.01%) is down by more than two-thirds from its 2011 highs, and the SPDR Gold Shares (GLD 0.18%) have lost more than 45% of their value over the same roughly four-year period.

Indeed, Silver Wheaton has seen even more dramatic losses, falling by three-quarters since 2011. That's because in contrast to the iShares Silver Trust and SPDR Gold Shares, Silver Wheaton's business model effectively leverages its exposure to bullion prices. In its most recent quarter, the company's average cash costs were around $4.60 per silver-equivalent ounce, leaving it with a cash operating margin of $10.45 per ounce. The constant cash costs mean that a 10% drop in bullion prices cuts operating margins by well over 10%, exacerbating cash flow declines and putting additional pressure on the dividend. That's a major part of why dividends have fallen by 65% since hitting their peak in early 2013.

When will Silver Wheaton's dividends rise again?
At least for now, Silver Wheaton has been able to stabilize its dividend payout. Over the past nine months, the company has averaged just over $0.25 per share each quarter in operating cash flow, which translates exactly to a targeted dividend $0.05 per share quarterly. As long as a tax dispute with the Canadian government doesn't create a huge unplanned expense, Silver Wheaton appears poised to sustain its current payout indefinitely.

That said, an increase in Silver Wheaton's dividend probably won't happen for a while. The last time Silver Wheaton paid $0.06 per share quarterly rather than $0.05, the preceding quarter had seen silver prices between $3 and $7 per ounce higher than their current level. Gold prices were similarly higher as well. Until gold and silver prices begin behaving better, it's going to be a stretch for dividend investors to expect richer payouts from the precious metals streaming company anytime soon.