Anglo Asian Mining: a future cash cow for income seekers?

Investing in equities can be a rocky ride for retail investors, but a solid track record of dividend payments is one way a listed company might look to share price volatility. If a dividend becomes unsustainable and gets cut, however, shareholders can suffer a reduction in income and a knock to the share price.

Take Basic Materials company Anglo Asian Mining (LON:AAZ), which pays a rolling dividend yield of 5.72%. The Company together with its subsidiaries is involved in the exploration and development of gold and copper projects in the Republic of Azerbaijan.

Business looks to be improving for the miner, which reported a 26% increase in revenue and an 18% increase in net income to $16.3m for the year to 31 December 2018. If this performance continues, perhaps further increases in its dividend payment might be expected?

Does Anglo Asian Mining generate enough earnings?

Dividend cover is perhaps the most widely used measure of dividend health. It is computed by dividing a company's earnings per share by its dividend per share (EPS/DPS). Usually, dividend cover of less than 1.5x earnings requires further investigation.

The rolling dividend cover for Anglo Asian Mining, based on projected dividends and earnings, is 1.99 and its trailing twelve month dividend cover is 2.05. Both of these figures are above the 1.5x safety threshold for Anglo Asian Mining. This suggests that the dividend could be safe.

Does Anglo Asian Mining have positive fundamental momentum?

A primary metric used by SocGen to assess dividend safety is an indicator known as the F-Score. Whereas most ratios (e.g. dividend cover) look solely at a company’s current financial state, the F-Score looks at the direction in which it’s financial state is moving. Companies are likely to have a safer dividend if the financial state is improving. Anglo Asian Mining’s F-Score is 8. This suggests that the group’s dividend is safe.

Does Anglo Asian Mining have a strong balance sheet?

An alternative way to analyse dividend safety is to focus more directly on a company’s balance sheet strength. A highly leveraged company that struggles to meet its short-term liabilities is more likely to cut its dividend than a well-financed one.

A safe level of net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. Evolution Mining’s net gearing ratio is -6.20% - below the 50% threshold.

The current ratio (current assets / current liabilities ) assesses a company’s ability to service short term debts. A current ratio of less than one tends to be a worry. Anglo Asian Mining’s current ratio is 2.42 - well above the 1x threshold.

Does Anglo Asian Mining (LON:AAZ) have enough cash?

Shareholders could take additional steps to analyse dividend safety by comparing Free Cashflows Per Share (FCF PS) with the Dividend Per Share (DPS). Anglo Asian Mining generated 25c in FCF PS. This is higher than the dividend per share of 7c  and indicates that the company has generated enough FCF to sustain dividends.

Reinvesting the income from company dividends can provide significant returns above those provided by capital gains. But you need to ensure that the payout can be sustained, or you could be in for a double-whammy of disappointment.

Powered by years of research and huge volumes of data analysis which are normally not available to private investors, we have developed the tools that will give you a better chance of picking income boosting stocks.

What are you waiting for. Click here to sign up to your free trial today.