Owners of South32 Ltd (ASX: S32) shares received a huge dividend in 2022 and then saw a big cut in 2023. Can the ASX mining share's payout return to strength soon?
In FY23, the company paid an ordinary dividend per share of US 8.1 cents. At the current exchange rate, that translates into AU 11.9 cents per share.
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Weakness expected in FY24
In the first quarter of FY24, the company saw its net debt increase by US$299 million to US$782 million because of lower commodity prices. It also saw a "temporary build" in working capital of around US$250 million as it made payments accrued in the prior period.
The miner is involved in a number of different commodities including alumina, aluminium, copper, silver, lead, zinc, nickel, metallurgical coal and manganese ore.
When the company released its FY24 first quarter update, the South32 CEO Graham Kerr said:
With macroeconomic conditions creating headwinds for many of our commodities, we remain focused on driving operating performance and cost efficiencies. This focus, along with our production growth in commodities critical for a low-carbon future, positions us well to capture higher margins as market conditions improve.
Many resource prices go through cycles, sometimes there is strength and sometimes there is weakness. I don't think weak commodity prices will last forever, particularly if the global economy rebounds in the next couple of years.
It could be a fruitless exercise to try to predict exactly when commodity prices will improve, but I'm optimistic about the longer-term outlook, considering there's a global decarbonisation effort that could be a boost for plenty of the resources South32 produces.
Commodity prices may be weaker, but broker UBS suggests some of the resources may be "bottoming out". The broker also points out a group-wide cost review program has been started for FY24 and FY25, looking at contractors, supply chains, procurement and capital expenditure.
Profit rebound to come?
UBS' current projections for FY24 suggest the business could make a net profit of US$770 million, translating into US 17 cents of earnings per share (EPS). This could enable a dividend payment of US 7 cents per share.
But, in FY25, UBS thinks South32's profit could jump to US$1.26 billion in FY25, which would be US 28 cents per share. The South32 board of directors could declare an annual dividend per share of US 11 cents, according to UBS. In other words, the dividend could grow by 57% in the 2025 financial year compared to FY24.
At the current exchange rate, the UBS projection for FY25 implies a grossed-up dividend yield of 6.8%. That's not a huge yield, but it's certainly bigger than what some blue chips are offering.
I think it could be a promising option for dividends in the years ahead if resource prices improve from here.
