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You Can’t Rely on This 6.5% Yielder

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I wish I had better news for Southern Copper (NYSE: SCCO) investors who enjoy their big dividend payments. But those investors have already been trained by the company’s management not to expect to continue to receive those same large dividends year after year.

There are two main problems, and free cash flow is one of them.

After steady growth for the past few years, free cash flow at the mining company is projected to get cut in half this year, falling to $1.7 billion from $3.4 billion in 2021. Next year, free cash flow is forecast to be flat, at $1.7 billion again.

Chart: Southern Copper Free Cash Flow
Declining free cash flow is an issue, but it gets even more serious when it no longer covers the dividend.

In 2021, Southern Copper paid out $2.5 billion in dividends, or 74% of the company’s free cash flow. I look for a payout ratio of 75% or lower, so it was at the upper limit of what I want to see.

This year, however, the payout ratio is projected to be 165%. So for every $1 of free cash flow, the company is paying out $1.65.

That’s not sustainable. And management knows this.

The company already slashed the dividend in August to $0.75 per share from $1.25. In fact, Southern Copper has cut the dividend six times since 2013.

The current $0.75 per share dividend comes out to $2.3 billion in payouts annualized. If free cash flow doesn’t improve quickly in 2023, another dividend cut is very likely.

Dividend Safety Rating: F

Dividend Grade Guide
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Good investing,

Marc

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