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

Female miner smiling in front of a mining vehicle as the Pilbara Minerals share price rises
Resources Shares

'Encouraging signs' for Fortescue shares heading into 2025

This leading investment expert forecasts brighter days ahead for Fortescue shares.

Read more »

Miner looking at a tablet.
Resources Shares

Are Mineral Resources shares now a buy amid CEO Chris Ellison's pending exit?

The company hosts its annual general meeting (AGM) on Thursday.

Read more »

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

Overinvested in BHP shares? Here are 2 alternative ASX mining stocks to buy

Let’s dig into some other mining opportunities.

Read more »

A smiling miner wearing a high vis vest and yellow hardhat and working for Superior Resources does the thumbs up in front of an open pit copper mine, indicating positive news for the company's share price today following a significant copper discovery
Resources Shares

Are these ASX mining shares the place to invest for 2025?

This expert reckons investors should avoid the biggest miners on the ASX.

Read more »

two men in hard hats and high visibility jackets look together at a laptop screen that one of the men in holding at a mine site.
Resources Shares

Mineral Resources shares on watch before AGM on Thursday

Investors will be on high alert.

Read more »

A happy boy with his dad dabs like a hero while his father checks his phone.
Resources Shares

Buy 5,000 shares of this top ASX dividend stock for $100 per month in passive income

I think this little-known ASX share is worth exploring for its dividend potential.

Read more »

Two miners standing together.
Resources Shares

BHP share price stepping higher as Brazilian court rules on 2015 dam disaster

BHP responded this morning to news reports of the Brazilian court ruling.

Read more »

Miner looking at a tablet.
Resources Shares

Here's a fund manager's bull case for Mineral Resources shares

It’s a rough time for this stock. Let’s dig into whether it’s an opportunity.

Read more »