Newmont Q4 Stock: Dividend Cut Is Likely Just Noise (NYSE:NEM) (2024)

Investment thesis

Gold has demonstrated a notable bullish run in 2023 due to the intensifying global macroeconomic uncertainty coupled with geopolitical issues. Such an environment is very favorable for the world's largest gold mining company, Newmont Corporation (NYSE:NEM). My analysis suggests that gold prices are likely to stay higher for longer as the level of macroeconomic and geopolitical uncertainties escalate. Newmont has a firm track record of success, and I like the management's current priorities to optimize the assets portfolio and drive profitability ratio expansion. Moreover, NEM currently offers a decent 3% forward dividend yield, which I consider safe and poised to demonstrate solid growth in the future after the recent cut. The stock is around 16% undervalued after the YTD pullback, which makes it a "Strong Buy".

Company information

Newmont Corporation is the largest gold mining company in the world, operating in the Americas, Australia, New Zealand, and Africa.

The company's fiscal year ends on December 31. According to the latest 10-Q report, the company generates around 90% of its revenue from gold. NEM also generates revenue from copper, silver, lead, and zinc.

Financials

Despite shrinking profitability between FY 2013 and 2022, NEM's financial performance over the last decade has still been solid. NEM still delivered double digits in FCF margin, which looks solid for a highly capital-intensive business that has paid dividends consistently over the last 34 years.

Stability in the FCF margin allowed NEM to build a fortress balance sheet with a notable pile of cash and very low leverage ratio. The total debt might look significant in absolute terms, $8 billion, but the vast majority of the amount is payable after 2027. Moreover, the company is in a massive $3 billion cash position, which also proves the strength of the balance sheet. NEM pays out dividends and returns money to shareholders via buybacks. Newmont's debt has an investment grade rating from Fitch. That said, the company's strong financial footing allows it to capitalize on attractive investment opportunities as they arise.

Since the company's financial performance significantly depends on gold prices, it is important to understand what to expect from the industry overall. First, it is essential to understand that gold is a defensive asset, and demand for it rises amid macroeconomic uncertainty. Therefore, as the world has experienced massive disruptions in recent years, which include a one-in-a-century pandemic and the major war in Europe, it is unsurprising that gold currently trades at all-time highs.

As the war in Ukraine is unlikely to end this year, and attacks on vessels in the Red Sea from Houthi intensified in recent weeks, it is unlikely that geopolitical tensions will ease in 2024. Major economies, except the U.S., continue experiencing bumpy trajectories in the aftermath of the pandemic and due to disruptions caused by the Russia-Ukraine war. The U.S. stock market is far from being overvalued as it was during the dot-com bubble or the pandemic rally, but current valuation metrics are above the historical trendline. This means that gold as a defensive asset will likely continue shining in 2024 and will last until geopolitical tensions ease or a major stock market correction comes.

We have fresh Q4 earnings available, which were released on February 22. Newmont delivered a very strong quarter, topping consensus estimates. Q4 revenue was $4 billion, a 24% YoY growth and substantially above Wall Street expectations. In terms of profitability, NEM also delivered a positive surprise.

Despite a strong Q4, the stock closed almost 8% lower yesterday. The reason is a substantial dividend cut and plans to restructure the portfolio of assets. In this context, I believe the dividend cut is merely noise, and potential investors should not allow it to overshadow Newmont's fundamental strength. I consider it a noise because when examining Newmont's dividend history, we may observe a pattern of erratic payouts despite a strong overall track record. Dividends have exhibited notable volatility, reflecting not desperation from management but rather their flexibility in reallocating spare financial resources to maximize value for shareholders. I am confident in it because the management has outlined priorities very clearly, and they look sound to me.

The gold industry is inherently cyclical, with shifts in cycles occurring suddenly and rapidly. Hence, I appreciate the management's focus on divesting the least efficient assets and driving margin expansion. As I've previously noted, we are likely in a highly favorable cycle for gold, and Newmont's aim should be to maximize cash flows during this period. When the industry inevitably enters a downtrend, valuations of gold assets will naturally compress. Newmont's accumulated cash pile from the supercycle will then prove invaluable for making wise investments and expanding operations. Since the management has a clear vision of how to achieve cost synergies to drive profitability, I believe it is highly probable that long-term financial targets are achievable.

To summarize, Newmont is the largest player in the industry, and it is experiencing robust momentum. The company is delivering results above the consensus and demonstrates strategic flexibility to take the maximum from the favorable cycle and get prepared for the inevitable shift in cycles. The balance sheet is robust, and the management is committed to maximizing profitability over the next couple of years. All these positive factors make me very bullish and I consider dividend cut a noise given all the other developments.

Valuation

The stock price has plunged by 30% over the last twelve months, and most of the pessimism was absorbed by the stock in 2024 with a -19% YTD return. From the valuation ratios point of view, the stock looks overvalued since most of them are higher than the sector median and historical averages.

However, the industry substantially depends on gold prices; therefore, multiples might swiftly and sharply over the short timeframes. Therefore, I think that the dividend discount model [DDM] will provide a more fair view of the stock's valuation. I use a 6.78% WACC recommended by GuruFocus. For the base dividend, I multiply the new $0.25 quarterly dividend by 4 and get one dollar. After a notable dividend cut, I believe that it means that the long-term growth rate will now be solid, and incorporate a 4% growth rate into my DDM.

My DDM simulation shows the stock's fair price is around $36. This represents a 16% upside potential, which looks attractive, especially considering the 3% forward dividend yield.

Risks to consider

As a company deeply entrenched in the commodities market, Newmont is acutely susceptible to fluctuations in the prices of gold and other metals it sells. Any shifts in these market prices can significantly impact the company's bottom line and overall financial health.

The company expands its scale by acquisitions, which is inherently risky. For example, in November 2023, Newmont acquired the Australian mining company Newcrest in a large $17 billion deal. This amount is around half of Newmont's market capitalization, meaning that the acquisition is large for NEM, and so are the risks. The investment might not pay off as planned while evaluating the investment opportunity due to a myriad of reasons spanning from potential integration challenges to not unlocking the full potential of synergies.

Bottom line

To conclude, NEM is a "Strong Buy". The recent pullback provides good buying opportunities, and the forward dividend yield is solid. I expect gold prices to stay elevated since the geopolitical situation in the world seems to be getting even more complex, and the stock market's valuation is likely to stay above the historical trendline.

Dair Sansyzbayev