Wheaton's Dividend Stream Is Undervalued

| About: Wheaton Precious (WPM)

Summary

Wheaton Precious Metals (formerly Silver Wheaton) recently announced a quarterly dividend of $0.07 per share with an ex-dividend which was set for May 23rd.

The company hasn't been increasing its dividend for a long time so there isn't lots of history to give investors a warm-fuzzy feeling.

When you do the dividend analysis, you get a stock value of $35 which makes the stock undervalued by about 68%.

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

Wheaton Precious Metals (NYSE:WPM) (formerly Silver Wheaton (SLW)) recently announced a quarterly dividend of $0.07 per share with an ex-dividend which was set for May 23rd, making the must own date May 22nd if you want to get paid the dividend. This dividend announcement is in line with what was announced the previous quarter and will be paid to shareholders on June 6th. The dividend is currently good for a 1.2% yield on today's share price of $20.89. Based on estimated forward earnings, the dividend is good for a payout ratio of 43.1% which is pretty great.

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Potential Future Dividends

The company hasn't been increasing its dividend for a long time so there isn't lots of history to give investors a warm-fuzzy feeling. Earnings growth projections for the company are below average for a precious metals company with a one-year growth rate of 12.6%. With that said, I believe a 9% increase to the dividend next year would be much better because the payout ratio is currently very low. A 9% increase would constitute an annual dividend of $0.30 for 2018 if it increases the dividend anytime soon again.

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 2 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 $0.28.

For the R value, I'm going to use 9.8% because it is the risk rate I want to beat. For the G value of the equation, I'm going to use a dividend growth rate of 9% (to be conservative) because I definitely believe the company could increase the dividend by that much whenever it is they do it next to keep investors happy. When you plug and chug all the numbers, you get a stock value of $35 which makes the stock undervalued by about 68% from today's price of $20.89. For reference, the 52-week high on the stock was $31.35 during summer of last 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 undervalued based on the dividend alone. The company has been around for quite some time and can definitely afford to increase the dividend when the next time comes around. There are many ways to value a stock; with the dividend, P/E, and PEG methods being a common place to start.

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 WPM.

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.

Additional disclosure: I am also short the July 23 call.

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