A Close Look at Barrick Gold Corp's Dividend Potential

By Reuben Gregg Brewer Markets Fool.com

Barrick Gold Corp (NYSE: ABX) cut its dividend by a massive 60% in 2015, taking the quarterly payment from $0.05 a share to $0.02 a share. Falling commodity prices and a heavy debt load made that hard decision the right one at the time. But gold and copper prices are heading back up, and so is the dividend. But after a 50% increase in the first quarter how much more can investors expect from this precious metals miner?

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Different models

If we were talking about Newmont Mining Corp (NYSE: NEM) you could fairly accurately predict what its dividend would be from one quarter to the next. That's because Newmont's dividend is tied to its realized price of gold. If gold is going up, you could reasonably expect Newmont's dividend to head higher, too. It's an interesting policy that adds a lot of clarity for income investors. Barrick doesn't do that.

Image source: Barrick Gold Corp

Barrick's dividend is left to the discretion of the board of directors. This, of course, is a far more typical arrangement than what Newmont Mining has put in place. But there's a lot more uncertainty for investors. Which means you have to look at the company's progress toward its goals to get a handle on what it might do with the dividend.

Where Barrick has been

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Barrick just increased its dividend by a massive 50% in the first quarter. That came after significant progress on a key goal, restoring balance sheet strength. For example, between the start of 2015 and the end of 2016 the gold and copper miner reduced its total debt by nearly 40%. That's a huge decrease in leverage. In fact, the company reduced its annualized interest expense by $100 million in 2016 alone because of the debt push.

Dividends in 2016 ate up just $86 million of cash flow. Using back of the envelope math, a 50% increase adds $43 million to that total, less than the annualized interest savings. The new total dividend cost would be around $130 million, assuming the share count remains constant year over year. It's a big percentage increase, however it appears that Barrick can easily handle the jump. But what's next?

Barrick isn't done with the balance sheet just yet. Image source: Barrick Gold Corp.

Where Barrick is going

The thing is, Barrick isn't done with the balance sheet. It wants to reduce debt to roughly $5 billion by the end of 2018. That's another 35% (or so) from the year end 2016 number. And it means that free cash flow will continue to be pushed toward debt reduction over dividend hikes. In other words, you probably shouldn't expect another dividend increase in 2017.

And while you might see an increase in 2018, it's likely to be modest on an absolute basis even if it's large on a percentage basis. For example, the huge 50% increase in 2017 amounts to an additional penny a quarter. That's not to downplay the important statement management was making by increasing the dividend, but we aren't talking huge numbers.

The balance sheet, of course, isn't the only thing Barrick is working on. It's also planning on increasing its capital spending plans in 2017 by as much as 33%. Another increase is planned for 2018. This spending is important to the gold miner's long-term success, but it's going to eat up more cash flow. And that makes big dividend increases even less likely.

Barrick has pulled back on capital spending, but it's still heading higher. Image source: Barrick Gold Corp

You've seen it

If you saw the big percentage increase in Barrick's dividend this year and thought it might be a nice way to get some gold exposure and income, you should keep looking. Barrick and its 0.6% yield isn't really a dividend investor's dream stock. Another hike in 2017 seems unlikely and 2018, because of continuing debt reduction efforts and increasing capital spending, isn't likely to see a big absolute increase either. Income investors looking for gold exposure should probably look at a company like Newmont where the dividend is a known commodity or even Royal Gold, Inc. (NASDAQ: RGLD), a streaming company which has a 15-year history of annual increases and a roughly 1.3% yield.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.