Many investors look for dividends. In this post I am showing how to find out whether a dividend paid by a company is sustainable in the long-term.
Let me start from a gold / silver miner, called Gold Resource Corp. (NYSE MKT: GORO). I have discussed this company in one of my articles - here is a link. Most recently this company has cut its dividend. I think this move was highly predictable.
First of all, the company has been paying dividends since 2010:
As the chart shows, between 2010 and 2012 the company was increasing its dividends. Then, after 2012, when a medium - term bear market in gold started, GORO started cutting its dividends. Well, quite a reasonable move. However, look at the chart below:
In my opinion, this chart is the best prove that GORO should not have been paying any dividends, even during good times. The chart shows a measure constructed in the following way:
cash flow from operations - cash flow from investing activities - dividends paid
All figures are taken from Statement of Cash Flow. Simply put, the figures calculated in the above presented way for each financial year (or quarter) show whether paying dividends by GORO was a right policy. It looks like it was not. In most financial years (those in red) the company was paying dividends despite the fact that it should not have done it.
In other words - for example in 2013 the company generated $6.87 million in cash flow from its (mining) operations. This cash was spent on investment of $6.67 million so the balance between cash delivered from operations and cash spent on investment was around zero (plus $0.2 million). A prudent company would not pay any dividends in 2013 but GORO did it - the company paid $25.5 million in annual dividend. I understand that the company's point of view was that this high dividend was paid because in 2012 GORO earned a lot of money (net profit of $33.67 million and $31,14 million in cash flow from operations). However, GORO is taking decision on paying dividends each month so in some point of 2013 the company's management should have made a decision to stop paying dividends. Unfortunately, they only cut it.
In December 2015 GORO declared that:
"The Company is modifying its instituted monthly dividend from one cent per share per month to 1/6 of a cent per share per month (or two cents per share per year) beginning with this December dividend."
Well, there are no miracles when a companys' economics is concerned - if a company is not able to pay dividend it will surely stop paying it at some point in the future. I think that cutting GORO's dividend to 1/6 of a cent per share per month means that the company have practically stopped paying it.
Intel (NASDAQ: INTC) - the company is regularly paying dividends. Let me check how this company looks when my financial measure is applied:
As the chart shows, since 2008 Intel has been definitely able to pay dividends. Only in 2013, when the company made substantial investments, the balance was negative. But this was a one-off event, with no material impact on Intel's ability to pay dividends.
Summing up - Intel could even increase its dividend because the company demonstrates a large buffer to do it (around $6 billion a year). On the other hand, Intel de facto does it - the company is buying its shares back from its shareholders.
Williams (NYSE: WMB) is a provider of large-scale natural gas infrastructure in North America. It is a very interesting business but, in my opinion, Williams' dividend policy is a total mistake:
As the chart shows, the company has been paying dividends although from a financial point of view it should not have done it. I guess that Williams is trying to be a growing company (it invests vast amounts of money each year to expand its business) and, simultaneously, an income company, which pays decent dividends. I believe it is a wrong attitude - the company cannot afford to pay dividends and grow its business in such a dramatic way as it has been doing. The negative effect is visible now:
As the chart shows, the company carries too much debt. A "Net Debt / EBITDA" multiple is standing at around 7, which is a very high reading. Prudent bankers would not lend any money to a company holding such a high ratio. What is more, investors share my opinion on Williams and sell its shares, despite a high dividend ratio (14.1%):