The move by Warren Buffett’s firm into the gold market recently definitely took a lot of investors by surprise. The reason being that Buffett has always played down the importance of investing in this space due to the clear lack of yield. He is on record as stating that he always has preferred investments which return a percentage of their cash to their shareholders. Since investing in physical gold does not generate a return for the buyer, Buffett has never been interested in this asset class – until now that is.
Buffett‘s company bought shares of Barrick (GOLD) a few months back and shares spiked on the news. Although Barrick pays a dividend just above the 1% mark, Buffett definitely took notice of how profits and subsequently dividend yields were on the increase in this sector. We have consistently stated that gold mining companies would eventually attract significant capital from investors looking for yield.
Mining stocks were in the doldrums for many years and only have really come back into their own over the past few years. To state that this sector now offers excellent opportunities for dividend growth investors would have been laughed at just a few short years ago. In fact, with the price of gold at all-time highs, the gold mining index (GDX) is still 30%+ below its highs of 2011. Suffice it to say, we continue to believe that gains are just beginning for many companies in this sector.
One such company which has a higher dividend (1.32%) and is cheaper than Barrick from both an assets and sales standpoint is Kinross Gold (KGC). In fact, Kinross recently reinstated the dividend on the back of growing production and improving financials. Let’s take a look at Kinross with respect to its key dividend metrics which will most likely confirm why dividend growth investors should be researching this space much more closely at present.
Firstly, one thing we like about Kinross is that its present price of $9.15 is still well below the highs it hit back in 2008. The MACD indicator has just recently moved into positive territory, which means price is no way near being oversold on the long-term chart. Followers of our work will know that we are waiting for this asset class to confirm an intermediate cycle low. Therefore, despite the bullish technicals in Kinross, investors should be prepared for some volatility over the near term.
If we look at the cash flow statement, we can see that Kinross generated $1.373 billion of operating cash flow and $377 million of free cash flow over the past four quarters. Net financing resulted in $712 million being issued in this timeframe but this in effect did not affect cash as $1.05 billion was indeed added to the cash balance. The forward dividend payment is $0.03 per share per quarter which will cost the firm roughly $150 million per year. Therefore, based on these numbers, we see no risk to the dividend here and fully back management’s decision to reinstate it.
Management really reinstated the dividend because it is fully aware of what is coming down the track. Just look at the expected earnings growth up to December 2022 below. Remember, earnings growth is the prime driver of share price appreciation over time. The price of gold is also another wildcard here. The perfect combination would be for Kinross’ rising production to take place at the same time as a bubble in gold prices. Time will tell if this indeed plays itself out.
In Kinross’ latest quarter, the company’s debt to equity ratio came in at 0.48 and its interest coverage ratio is now well over 15 over a trailing twelve-month average. The interest coverage ratio, for example, continues to improve due to strong margins, which easily outpace the averages in this sector. Metrics such as EBITDA margin of 43.46% and return on assets (ROA) of 8.69% are well ahead of the industry in terms of profitability and should facilitate strong dividend growth going forward.
Therefore, to sum up, although Kinross’ dividend yield may not turn heads at present, there is substantial room to grow the pay-out in the years ahead. Furthermore, expected EPS growth over the next few years should result in a much higher price for Kinross. Dividend growth investors need to begin looking at this space for sustainable gains as Buffett has done. We will look to put on something in here shortly.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in KGC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.