The next ASX 200 stock that can pay a special dividend in the near-term

The prospect of a special dividend from this ASX 200 stock is likely to excite investors as we are living in a period of dividend cuts!

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The prospect of a special dividend is likely to excite investors as we are living in a period of dividend cuts!

You only need to look at ASX banks to understand the distribution gloom. It was only yesterday that Australia and New Zealand Banking GrpLtd (ASX: ANZ) declared a 35 cents final dividend, which is less than half of the 80 cents it paid last year.

But the cash outlook for ASX mining stocks could not be more different. I am not even talking about iron ore majors like the Fortescue Metals Group Limited (ASX: FMG) share price or Rio Tinto Limited (ASX: RIO) share price.

Special dividend could boost the IGO share price

These stocks may be well placed to undertake a capital return in 2021, but there's another lesser known candidate that could pull a dividend rabbit from its hat.

This miner is the IGO Ltd (ASX: IGO) share price. UBS believes the nickel miner could undertake a capital return imminently.

The broker's bullish call follows IGO's quarterly update, which was well ahead of expectations. Production and costs were better than expected at two of IGO's key projects – Tropicana and Nova.

More cash than projects

This means IGO is flushed with cash. While some of this is likely to be put towards an acquisition to expand its nickel reserves (Nova's mine life only runs for around six years), IGO should have some leftover.

The excess cash may be either applied to a share buyback given the underperforming IGO share price, or be paid out to shareholders.

"IGO has A$509m of net cash, this translates to ~A$0.85ps or ~20% of the share price," said UBS.

"Part of this may be applied to M&A opportunities…. But we think there will remain surplus cash to consider a step change in returns. Especially considering the ~15% [free cash flow] yield IGO is generating."  

IGO shareholder returns in focus

IGO indicated previously that it will be reviewing shareholder returns before January 2021. Investors can't rule out a special dividend or some other capital return initiative.

On the other hand, a share buyback might make more sense as UBS pointed to the IGO share price trading at around a 20% discount to its valuation.

Is the IGO share price a buy?

The broker is recommending IGO as a "buy" with a 12-month price target of $5.45 a share.

UBS has also pencilled in a close to 30% increase in FY21 dividend to 14 cents a share, although this falls back to 12 cents in the following year.

That's still not a bad outcome for what I consider to be an undervalued stock.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited and Rio Tinto Ltd. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Resources Shares

Miner looking at a tablet.
Resources Shares

Does Wilson Asset Management prefer Rio Tinto or BHP shares?

Which miner is in favour?

Read more »

Two smiling men in high visibility vests and yellow hardhats stand side by side with a large mound of earth and mining equipment behind them smiling as the Carnaby Resources share price rises today
Resources Shares

Macquarie tips this ASX 200 resources stock to soar nearly 40%

Big returns could be on offer here according to the broker.

Read more »

A man clenches his fists in excitement as gold coins fall from the sky.
Resources Shares

Bell Potter says this ASX 200 mining stock can rise ~30%

Let's see why this miner could be destined to deliver big returns over the next 12 months.

Read more »

Man with rocket wings which have flames coming out of them.
Resources Shares

Up 23% today, why Macquarie forecasts this ASX 200 mining stock could rocket another 33%

Macquarie forecasts more outsized gains to come for this surging ASX 200 mining stock.

Read more »

Three mining workers stand proudly in front of a mine smiling because the BHP share price is rising
Resources Shares

Forget gold! This metal just hit record highs and ASX 200 miner BHP is betting big

Let’s find out why.

Read more »

Three miners looking at a tablet.
Broker Notes

Does Macquarie prefer Rio Tinto, Fortescue or BHP shares heading into 2026?

BHP, Rio Tinto, or Fortescue? Macquarie only expects one of the three ASX mining stocks to outperform.

Read more »

Three miners wearing hard hats and high vis vests take a break on site at a mine as the Fortescue share price drops in FY22
Resources Shares

3 reasons why the Mineral Resources share price is primed to rebound

Can the troubled miner get out of its hole?

Read more »

Image from either construction, mining or the oil industry of a friendly worker.
Resources Shares

4 reasons to buy this surging ASX All Ords mining stock today

A leading wealth manager expects more outperformance from this surging ASX All Ords miner.

Read more »