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What to look for to uncover “Dividend Dominators”…
Over time, I’ve identified three MAIN reliable benchmarks for pinpointing “Dividend Dominators”. They must have…
#1: A proven history of paying a dividend: The longer a company’s paid dividends, the better. But, usually I want to see at least three to five consecutive years of dividend pay-outs.
#2: High cash flow growth + Low debt: When it comes to companies paying dividends, cash flow is king!
Because this is where the money for dividends – and increasing dividends – comes from. So I like to see a company generate tons of cash from its operations.
In addition, the less debt a company has, the more cash it can put toward dividends. A company that uses debt to pay dividends will not be able to sustain them – let alone grow them.
#3: A low pay-out ratio: There should be room to grow the amount of money going toward dividends in the future. A current pay-out ratio of 50% is great. But I can accept a pay-out ratio above 30. That gives the company plenty of room to ramp it up over time.
Bonus – Dividend yield: A company’s yield can also be a useful metric – especially for value investors. You can also use it to compare the income you’d receive with bonds, other companies, money-market accounts etc. But for me a company with high yield is just a bonus. Sometimes even the best and most reliable dividend-payers sit on low yields.
Just look at how this formula fits with a Real Wealth “Dividend Dominator”– Afrimat (JSE: AFT), which returned over 37% in 2020.
Afrimat has paid dividends over the past 5 years and grown them over the past 3 years.
In 2020, the company’s net cash from operating activities increased by 64.9% to R676.8 million.
And its current pay-out ratio of 35% is acceptable.
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So will Afrimat pay a higher dividend in 2021?
I certainly think so!
You see, one of Afrimat’s businesses makes money from mining and selling iron ore.
Afrimat bought the Demaneng iron ore mine back in late 2016 and they’ve done an amazing job with its turnaround.
In year one, it invested heavily to fix up the Demaneng iron ore mine and revived it back into production.
By 2017, the mine made revenue of R29 million. A year later in 2018, the mine’s revenue soared to R368 million. It also ramped up production from half a million tonnes to R1 million tonnes.
In 2019, revenue nearly doubled to over R682 million. And in 2020, revenue generated now stands over R1 billion!
Since 2018, operating profit has rocketed from a loss of R33.4 million to a profit of over R321 million!
And over the same period the mine has helped Afrimat TRIPLE its cash generation to over R600 million today. Thanks to this, the company has paid off the majority of its debt.
A post-pandemic recovery in China’s economy is boosting demand for iron ore – more than supply. This demand/supply imbalance has caused the price of iron ore to soar +100%, from a low of $80 in early 2020 to over $166, as I write this.
In other words, a high iron ore price means higher revenues (and cash flows) for Afrimat. And that should mean a rising dividend in 2021.
It’s a definitely a share worth owning if you want consistent income every year.
See you next week.
Managing Editor, The South African Investor