Does the 6.1% Centamin dividend yield make it a top gold stock to buy?

Is Centamin’s generous dividend yield too good to ignore or too good to be true. G A Chester investigates this FTSE 250 gold stock.

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Centamin‘s (LSE: CEY) dividend has caught my eye. But a high yield alone isn’t sufficient for me to buy a stock. There are always other things to consider. Here, I’ll discuss not only the dividend, but also the business that produces it. And the risks there may be in owning the stock.

The Centamin dividend

If I buy Centamin today at 107p a share, what can I look forward to in the near term? Well, the board has said it intends to “recommend a minimum 2021 dividend of $105m”.

Based on the company’s current number of shares in issue (1,156,450,695), this equates to $0.0908 a share. And based on the $/£ rate of 0.717, as I’m writing, it translates to 6.51p a share. This would give me a yield of 6.1% on the current 107p share price.

One thing I need to note about the Centamin dividend is that I’m exposed to currency risk. I may get a payout of 6.51p a share. But it may be more or less, depending on the $/£ rate at the relevant time. And, of course, assuming the board does actually recommend that minimum distribution of $105m.

More on the Centamin dividend

In a first-quarter production report, Centamin said it had made “a good start to 2021”. It reiterated its production guidance for the full year of 400,000 to 430,000 ounces of gold. It also reiterated its cost and capex guidance.

I have to accept that the risk of operational setbacks is higher with miners than with companies in some other industries. But the news from Centamin so far this year bodes well for its 2021 dividend.

What of next year and beyond? Fluctuations in the price of gold put Centamin at risk of ups and downs in sales, profits and dividends. However, with gold being a reliable hedge against inflation over the long term, I can live with shorter-term fluctuations in returns. Particularly because I see its dividend policy as extremely attractive.

It says: “Maintaining a sustainable dividend policy is central to our strategy. Our dividend policy makes firm commitments on capital allocation, meaning shareholder interests are always at the centre of what we do:

  1. The first 30% of free cash flow is ring-fenced for dividends.
  2. After assessing growth capital requirements, any surplus cash is returned to shareholders.”

Cash and pipeline

When I look at Centamin, I see a company that isn’t artificially paying a generous dividend by increasing its debt. The company consistently maintains a strong balance sheet. As last reported it had “no debt, no hedging and cash and liquid assets of $331m”. This big cash buffer provides some comfort against the aforementioned elevated operational risks that come with an industry like mining.

The exploration and development of new assets is also a risk with miners. However, Centamin has an active growth pipeline. I’m particularly encouraged by a recent preliminary economic assessment of the company’s Doropo project. This envisages average annual gold production of more than 200,000 ounces for the first five years.

A top gold stock to buy?

As I mentioned at the top of this article, a high yield alone isn’t sufficient for me to invest in a company. However, backed by Centamin’s attractive dividend policy, cash-rich balance sheet and growth pipeline, I think the 6.1% yield makes this a top gold stock for me to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester 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.

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