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One dividend knockout I’d buy over BP plc right now

Mineral exploration, development and mining company Centamin (LSE: CEY) delivered its third-quarter preliminary production report this morning relating to the firm’s principal producing asset, the Sukari Gold Mine in Egypt. I reckon it will be pleased with the figures the mine produced over the past three months.

Record production, and rising

Total gold production for the quarter was the highest ever at 156,533 ounces, which the firm says is a 26% increase over the previous quarter and 5% higher than the equivalent period a year ago. Centamin reckons production for the whole of 2017 is on course to hit 540,000 ounces, which means 2017 will be the eighth year of production growth from the Sukari Gold Mine.

The company extracts ore from the field with both open pit and underground mining operations and chief executive Andrew Pardey said “all sections of the mine continued to perform well during the third quarter, contributing to record production.” The big bonus of such success is an increasing flow of incoming cash, which it is doing a good job of sharing with investors via the dividend.

Centamin aims to pay 30% of net cash flow into the dividend after sustaining capital costs and following the payment of profit share to the government of Egypt. At today’s 147.5p share price, the forward dividend yield runs at a little over 3.6% for 2018 with the payout covered just over 1.8 times by anticipated forward earnings.

Growth prospects

I like the idea of collecting the firm’s dividend payments while being exposed to the company’s growth potential. The directors reckon the underground operation at Sukari is an important value-driver and they “expect further growth of the reserve over the coming years as development and exploration continues.” There’s also promising new exploration potential within the north-eastern Cleopatra zone of Sukari Hill, and an infrastructure development programme aimed at supporting mining rates of up to 1m tonnes per annum. On top of that, the firm is also focused on “extensive licence holdings in West Africa.” 

I think there is plenty for us to shoot for with Centamin’s stock and the firm appeals to me more than BP (LSE: BP) right now. It’s true that the oil giant’s forward dividend yield is higher than Centamin’s, at a little over 6% for 2018, but forward earnings don’t quite cover the payout.

Vulnerable dividend

I’ve been alarmed at how vulnerable BP has proven to be to the effects of the fluctuating price of oil. During 2014, 2015 and 2016, profits collapsed and BP even posted a loss in 2015. Even after the resurgence in earnings during 2017 and 2018 that City analysts predict, dividend cover from earnings remains thin and I reckon the forward dividend could come under pressure if the oil price takes another dive.

Debts are high at BP. The balance sheet for 30 June recorded net borrowings of $39.8bn, up around 29% on the year before. The contrast with Centamin couldn’t be starker. Back in March, the firm had zero debt, cash, bullion on hand, gold sales receivables and available-for-sale financial assets of $290.9 million,” which all adds up to a strong balance sheet. Both firms suffer from volatility in the commodity markets, but I think Centamin looks well-placed to thrive in the current environment.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended BP. 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.