Newmont's Variable Dividend May Be Reduced as Policy Is Adjusted to Reflect Higher Mining Costs

Newmont, the world's largest gold producer, is inching closer to a dividend reduction as inflated operating costs have squeezed profits and driven the payout ratio to uncomfortable levels, leading management to reevaluate the firm's dividend policy.
Source: Simply Safe Dividends

The firm's current dividend framework structures the payout with a fixed base rate of $0.25 per share each quarter plus a variable-rate component funded with 40% to 60% of incremental cash flow earned from gold prices above a defined threshold of $1,200 per ounce.

This structure has resulted in a combined quarterly payout of $0.55 per share since March 2021, with variable dividends accounting for just over half of that amount.
Source: Simply Safe Dividends

However, as mining costs have steadily risen over the last few years and the price of gold has held relatively flat, management is considering raising the dividend policy's $1,200 variable-rate gold price hurdle. Doing so would essentially shrink the amount of excess cash flow available for the variable payout – assuming steady gold prices.
Source: Newmont Investor Presentation, November 2022

While this action would likely result in an increased base dividend, we expect the variable component to decrease by a larger amount and result in an overall payout reduction.

Even without adjusting the dividend framework, with mining costs rising faster than gold prices and more investments needed to hit the firm's greenhouse gas reduction targets, Newmont has less cash flow available to support the floating dividend component than management expected two years ago when this portion of the payout was last changed.

We estimate the firm's aggregate dividend could be reduced by anywhere between 20% to 40% to restore the payout ratio to a more sustainable level.

As such, we are downgrading Newmont's Dividend Safety Score from Borderline Safe to Unsafe to reflect the smaller pool of cash flow available to support the dividend and the corresponding increased likelihood of a reduced payout.

That said, while an Unsafe rating may seem alarming, many Newmont shareholders likely expect some fluctuation with the payout given the volatile nature of the gold mining industry.

And investors wanting exposure to gold, perhaps as an inflationary hedge, may still find Newmont an attractive investment, even if the dividend yield becomes less attractive.

We would consider returning Newmont's Dividend Safety Score to Borderline Safe once the payout has adjusted to the new dividend framework and more stability can be expected.

If we were shareholders, we would likely continue holding the stock, assuming our investment decision was driven more by a desire for gold exposure than highly predictable dividend income. 

However, conservative investors uneasy with the variable nature of Newmont's dividend may want to consider Royal Gold (RGLD), which offers more income stability, albeit at a lower yield, given the business makes money by acquiring mining royalties and is much better protected against the rising costs of operating mines.

Overall, Newmont remains an industry leader with a strong BBB+ rated balance sheet and size advantage.

As such, the firm is better positioned to grow acquisitively in the years ahead, which may become increasingly important as miners have struggled to find new gold deposits in recent years.

According to the Wall Street Journal, only 8% of the major deposits discovered over the last 30 years came within the last decade.

This environment has led Newmont to make an acquisition offer for Newcrest Mining, Australia's largest gold miner, for a price valued around $17 billion – or nearly 50% of Newmont's market cap.

Few details have been shared to this point, but we estimate that the proposed takeover, an all-stock transaction, would provide only a modest boost to earnings in the near term.

While there's no indication this offer will impact the dividend, early reactions suggest competing mining firms will enter the discussion, driving the takeover price higher.

With the situation fluid, we'll keep tabs on any developments that could impact the dividend and provide updates as needed.

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