Newmont Mining Corp (NYSE: NEM) investors were treated to a 50% dividend increase in September of 2017, three times the payment investors received in the third quarter of 2016. You might think that this giant gold miner was hitting on all cylinders based on that dividend news, but don't jump to conclusions so quickly. Newmont is doing OK, but the dividend increases are tied to something else. Here's what you need to know to understand Newmont Mining's dividend history.
The core business
Newmont's primary business is mining for gold. There are a few things that drive the business model, including the costs it incurs to look for, mine, and process gold -- but gold is a commodity, so the price it receives for the gold it sells is set by the market. And gold's value has a history of extreme, and sometimes sudden, price swings.
Image source: Getty Images
When gold prices are high miners like Newmont can make a lot of money, as mining costs generally don't move as quickly as gold prices. But when gold prices fall margins can swiftly tumble into negative territory, leading to red ink on the bottom line. Afterwards it can take years to notably lower costs.
As an investor, owning a gold stock is an attempt to benefit from gold's price moves as well as a miner's business performance. Newmont has tried to ensure its shareholders are rewarded when gold prices move up, but also that they share in the pain when gold prices fall. And it's done this in as clear a way as possible with its dividend.
The dividend policy
Instead of linking the dividend to corporate performance as most companies do, Newmont has linked its dividend to the price of gold. Not only that, it has published a table explaining what the dividend will be at certain gold price levels, based on the average gold price in the preceding quarter.
|Average Gold Price||Quarterly Dividend|
Data source: Newmont Mining
Because the gold price used is an average over a quarter, you probably won't be able to figure the exact value used to determine the dividend yourself. However, by simply watching gold over the quarter, you should be able to get a relatively good idea of what to expect on the dividend front.
As with any dividend, the actual payment is at the discretion of the board of directors -- so the dividend policy could change at any time. But if you are looking to participate in the ups and downs of gold, Newmont offers you a pre-articulated way to do so. And you'll be rewarded with cash in addition to stock price moves. By initiating a gold-linked dividend Newmont has added a little bit of certainty to a sector that's known for volatility.
As you look at Newmont's dividend policy, you might wonder if there's another way to do this. The answer is yes. Gold and silver streaming company Wheaton Precious Metals (NYSE: WPM), for example, sets its dividend at 30% of the average cash generated by operating activities in the previous four quarters.
Streaming is a different business model than mining, with Wheaton acting more like a specialty finance company that gets paid in gold and silver. Generally speaking, Wheaton's dividend should go up when gold and silver prices rise. But cash generated by operating activities is based on more than just precious metals prices, so it isn't as direct a link as what Newmont offers. And there's no way at all for you figure out what the dividend will be ahead of time.
That doesn't make Wheaton a bad dividend option, but the dividend doesn't respond as quickly to changes in precious metals prices as Newmont's dividend.
A unique dividend option
The typical approach to dividends is for the board to set the dividend at whatever it believes is an appropriate rate. That's what precious metals giant's Barrick Gold and Goldcorp do, along with many others. However, that leaves investors open to dividend changes that may not match up with the performance of the company as gold prices rise.
There are reasons why a company might want to hold on to the extra cash, such as paying down debt or investing in new assets. However, if you want a little more certainty, Newmont's policy ensures that you will benefit from an increasing cash dividend if gold prices are going up. And since it's tied to gold, not a corporate performance metric, you can get a good idea in advance of what your dividend check will look like each quarter. That's the kind of certainty that can make investing in a gold stock a little easier to stomach.
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