The VanEck Gold Miners ETF (NYSEArca: GDX), the benchmark bullion miners ETF, isn’t known as a dividend destination. Those are the breaks when an ETF has a yield of around 0.40%, but GDX’s dividend outlook is changing for the better.
GDX is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. Stock fundamentals like cost deflation across the mining industry, share valuations below the long-term average and rising M&A are all supportive of the miners’ space as well.
“Gold miners may increase cash returned to shareholders as gold prices rise but should exhibit more caution than in past bull cycles,” says Fitch Ratings. “Greater discipline around capital allocation and an emphasis on the sustainability of dividends when trends are bearish is anticipated, given emphasis on maintaining financial and operating flexibility. Moreover, a focus on improving cost positions and optimizing assets due to declining availability of high-quality assets and growing interest in long-term cash generation should curb widespread shifts in financial strategy.”
The precious metals mining industry has also been on the road to improved efficiency as they cut costs, increase production and raise more money. Supporting the bullish thesis for ETFs such as GDX is that many gold miners are finding ways to boost output while keeping a lid on costs.
Good News For GDX
Fortunately for investors considering GDX, there are traits that indicate miners’ dividend growth is a viable trend.
“We expect industry FCF to remain robust in 2020 after modest improvement in 2019, even without further rallies in the price of gold due to cost reduction efforts, increased efficiency, and lower capital spending,” notes Fitch. “Higher than expected FCF, due to a potential sustained increase in the price of gold, might be used to accelerate deleveraging if leverage metrics are outside of management’s stated targets or for M&A. Gold miners may also return more cash to shareholders.”
To start 2020, Newmont Goldcorp (NYSE: NEM), GDX’s largest component, has already increased its dividend by a whopping 79%.
“Newmont announced a 79% quarterly dividend increase to 25 cents/share on January 6, stating the action aligns with its disciplined approach to capital allocation that entails maintaining an investment-grade balance sheet, investing in profitable growth and returning cash to shareholders,” said Fitch. “Newmont recently initiated a stock repurchase program of up to $1 billion but is targeting net debt/EBITDA of below 1.0x over time, post its 2019 purchase of Goldcorp.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
