In the gold sector, the phrase "returning cash to shareholders" has never been that popular. But that is starting to change.
With gold prices holding stubbornly above US$1,200 an ounce, mining companies are swimming in cash and they're getting serious about paying higher dividends.
This year, most of the major gold companies have raised their dividend, including Barrick Gold Corp. (up 20%), Newmont Mining Corp. (up 50%) and AngloGold Ashanti Ltd. (up 17%).
You can't blame them for wanting to take some shareholder-friendly measures. The simple fact is that they have not been great investments, even at these record prices. The large gold miners have, for the most part, drastically underperformed the price of gold itself because investors worry about how they are going to grow their production and keep costs in check.
It raises the question of why investors should buy these companies when they can just buy one of the exchange-traded funds that track the gold price.
Gold ETFs have steadily added to their holdings in recent years and now hold more than 2,100 tonnes of gold (or 74 million ounces), according to Barclays Capital. That makes them very credible competition to the equities.
"You don't have to buy a gold equity if you want exposure to gold bullion. It's huge competition and the ETFs have definitely outperformed the senior producers," says Catherine Gignac, an analyst at NCP Northland Capital Partners.
One obvious advantage the gold equities have over ETFs is that they can pay dividends, so it can only help that they are increasing them.
The problem, experts say, is that the payouts are still far too meagre to make much of a difference. The dividend yield for most gold companies is somewhere between 0.5% and 1%, which is not enough to make them appealing on their own.
Gold companies started paying dividends because they wanted to be eligible for large funds that require some sort of payout. If they want to be taken seriously as income investments, some experts say they should think about getting their dividend closer to the 5% range typical of utilities and telcos.
"If you up your dividend to a 5% yield, you will get the attraction of a heck of a lot of generalists who are going to be ditching their ETFs and buying your stock," Ms. Gignac says.
On the other hand, skeptics point out that gold is a very capital-intensive business, and there are always new opportunities for these companies to deploy their cash in order to increase their reserves and production. And that is, after all, the reason people buy gold equities instead of ETFs.
From that perspective, one could argue that paying these small dividends has not been worth the effort of the companies that have done it, and they would be better off deploying their cash in other ways.
But David Whetham, a resource fund manager at Scotia Cassels, says that paying a dividend is good discipline if nothing else. "It really focuses the management on maximizing cash and getting returns for shareholders," he says.
He suggests that we could eventually see gold companies paying dividends in the 4% or 5% range, simply because of the enormous amounts of free cash flow they're generating at these prices.
"We seem to be getting to a point where the cash flow exceeds the capital requirements, and there's plenty of spare cash," he says.
pkoven@nationalpost.com
