Silver Wheaton: Dividend Model Shows Overvaluation

| About: Wheaton Precious (WPM)
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Summary

Silver Wheaton recently announced a quarterly dividend of $0.06 per share with an ex-dividend which was set for November 21st.

This dividend announcement is a 20% increase with what was announced the previous quarter and was paid to shareholders on December 7th.

The dividend model shows a stock value of $8 which makes the stock overvalued by about 58% from today's price of $19.11.

A dividend is just one of many ways a company can reward its shareholders by paying them out in cash. The investor can then choose to take the cash and run, reinvest it in the company, or invest it in a different company. After a company has made their net income for the quarter they have the choice of what to do with it and the choices are usually to either plow the money back into the business for other investments or pay some of that money back to the shareholders in the form of a dividend.

Most Recent Dividend Announcement

Silver Wheaton recently announced a quarterly dividend of $0.06 per share with an ex-dividend which was set for November 21st, making the must own date November 18th. This dividend announcement is a 20% increase with what was announced the previous quarter and was paid to shareholders on December 7th. The dividend is currently good for a 1.3% yield on today's share price of $19.11. Based on trailing earnings, the dividend is good for a payout ratio of 2400% which is pretty horrible. From a cash flow perspective the company has paid $74M in dividends over the past twelve months on operating cash flow of $543M which is good for a 14% operating cash flow payout ratio.

Potential Future Dividends

The company has been increasing its dividend for the past two years so there isn't much history to give investors a warm-fuzzy feeling. Earnings growth projections for the company are pretty bad for a silver company with a one year growth rate of 40.3% and five year growth rate of 20%. With that said, I believe a 17% increase to the dividend next year would be much better because they should throw investors a bone at a time the company is not doing so well. A 17% increase would constitute an annual dividend of$0.28 for 2018 if it increases the dividend in 2017.

Dividend Valuation

Now let's get to the meat and potatoes, the dividend valuation model to determine a price that the stock should be at based on the dividend alone. Since I just mentioned that the company has been increasing its dividend for the past two years we know that it has a pretty short history of increasing it and should continue to increase it going into the future. The dividend growth model equation takes the form of:

Annual Dividend [D]

Rate of Return [R] - Dividend Growth rate [G]

Where D is equivalent to the current dividend, R is the rate of return desired by the investor, and G is the anticipated growth rate of the dividend. For the D value I'm going to use the existing dividend rate of $0.24.

For the R value I'm going to use 20% because it is the smallest of the two earnings projections I referenced earlier. For the G value of the equation I'm going to use a dividend growth rate of 17% because I definitely believe the company could increase the dividend by that much at the end of next year to keep investors happy. When you plug and chug all the numbers you get a stock value of $8 which makes the stock overvalued by about 58% from today's price of $19.11. For reference, the 52-week low on the stock was $10.04 during the late January timeframe earlier this year.

Conclusion

The dividend discount model is just one of many ways to value a company and should be taken into consideration while trying to evaluate a company. Assumptions are always made while using valuation models and I believe I've selected some of the most conservative criteria for the valuation in this article. This valuation model shows the value of the dividend stream and that the stock is overvalued based on the dividend alone. The company has been around for quite some time and can definitely afford to increase the dividend when 2017 comes around.

The company currently trades at a trailing 12-month P/E ratio of 2388.75, which is expensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 21.35 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (59.3), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 40.28%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 40.28%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 20%. There are many ways to value a stock; with the dividend, P/E, and PEG methods being a common place to start.

I actually initiated my position in Silver Wheaton in late September and have been pretty upset with the purchase thus far. So far, I'm down 71.9% on an annualized basis, but will only purchase shares as long as they are below $20, because I believe that is where it offers additional value. I've selected $20 because it is the midway point of the 52-week range.

I swapped out of O'Reilly (NASDAQ: ORLY) for Silver Wheaton during the 2016 third-quarter portfolio change-out because I ended up turning a profit in the name (0.1%, or 0.5% annualized) and wanted to lock in those profits. I have lost out quite a bit, as O'Reilly has outperformed Silver Wheaton since the swap. For now, here is a chart to compare how Silver Wheaton and O'Reilly have done against each other and the S&P 500 since I swapped the names.

When it is all said and done, it matters what the stock has done in an investor's portfolio at the end of the day. For me, Silver Wheaton is one of my smaller positions and has been an anchor, as I'm down 21.9% on the name, while the position occupies roughly 4.5% of my portfolio. I will only make additional purchases in the name as long as it is below $20 as I stated earlier. I own the stock for the speculation portion of my portfolio, and I will continue to hold onto the stock for now. My portfolio is up 10.9% since inception, while the S&P 500 is up 7.8%. Below is a quick glance at my portfolio and how each position is performing. Thanks for reading, and I look forward to your comments.

Company

Ticker

% Change incl. DIV

% of Portfolio

Eaton Vance Corp

(NYSE:EV)

6.26%

5.00%

Electronic Arts Inc.

(NASDAQ:EA)

4.09%

3.64%

Starbucks Corporation

(NASDAQ:SBUX)

1.75%

4.78%

The Home Depot, Inc.

(NYSE:HD)

1.73%

4.78%

V.F. Corporation

(NYSE:VFC)

1.16%

5.16%

General Electric Company

(NYSE:GE)

1.01%

4.75%

AbbVie Inc.

(NYSE:ABBV)

0.61%

3.87%

Facebook, Inc.

(NASDAQ:FB)

-2.96%

8.71%

Skyworks Solutions Inc.

(NASDAQ:SWKS)

-3.06%

9.16%

Diageo plc

(NYSE:DEO)

-7.29%

6.98%

Gilead Sciences Inc.

(NASDAQ:GILD)

-12.33%

18.58%

Silver Wheaton Corp.

(SLW)

-21.89%

4.48%

Cash

$

20.11%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long SLW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.