As an investor, sometimes I’m attracted to a stock because of the dividend yield. Other times, it’s the growth potential I see in the share price. Occasionally, both of these combine together. At the moment, I think this is the case for Polymetal International (LSE:POLY) shares. Thanks to a recent increase in the dividend payout, the commodity stock now appeals to me on both fronts.
Income and growth
First up is the case for income. Earlier this month, we got the full-year results from the business. When looking at the viability of a stock to pay out a sustainable dividend, I’m looking at cash flow and debt levels. Polymetal reduced net debt by 16% from 2019, to around $1.3bn. This ensured free cash flow increased substantially, enabling a payout of $480m in dividends.
This sharp increase in the dividend payments increases the dividend per share, and thus the overall dividend yield. Even with Polymetal shares rallying on the results, the yield still increased to 6.32%. This is almost double the FTSE 100 average, and definitely looks attractive to me.
In terms of growth, the results showed a very strong year thanks to rising commodity prices. Revenue jumped 28%, with total cash costs down 3%, leading to a very healthy overall profit. I do accept that you could credit the performance mostly to gold and other precious metal prices, instead of Polymetal specifically. At the same time, as long as I’m aware of this, I don’t see it as a risk.
Personally, I think the gold price will rise above $2,000 per ounce by the end of the year due to low interest rates around the world. Low rates mean investors feel more comfortable allocating funds elsewhere, even in non-income paying assets like gold. So even if the company just keeps on performing with the factors in its control, Polymetal shares should rise.
What’s the risks with Polymetal shares?
A big risk is the currency fluctuations for Polymetal shares. The company is exposed mainly to the Russian rouble and Kazakhstani tenge. This worked in the company’s favour last year, with both currencies depreciating versus the US dollar. However, if they bounce back this year, it’ll hurt profits. Given the volatility of these emerging markets currencies, I’d be cautious. Although not explicitly stated, I’d hope the company is aware of this risk and has taken steps to hedge or protect itself in this regard.
One other risk is Covid-19. Any mine or construction area could be shut down again by the government. Given that Polymetal has mines around the world, it’s more exposed to Covid-19 disruptions than domestic businesses. Not only the mines, but transportation as well. However, I personally think the worst of the pandemic is behind us. Therefore I’m not overly concerned in this area.
Ultimately, I think Polymetal shares look very attractive and would look to buy in. The generous dividend increase helps my passive income, and the upside from the gold price could pull the share price higher too.
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.