The South32 Ltd (ASX: S32) share price recently hit a 52-week high of $3.52.
And while the mining giant's shares have pulled back a touch since then due to the market volatility, they remain 33% higher year to date.
Is the South32 share price a buy for dividends?
Despite the South32 share price trading close to a 52-week high, the company could still be a great option for income investors.
That's the view of the team at Goldman Sachs, which have a conviction buy rating and $3.80 price target on its shares.
Goldman Sachs likes the company for three reasons. The first is the South32 share price valuation, which it notes is trading below its net asset value.
The second reason is the company's strong free cash flow generation thanks to favourable commodity prices. This is particularly the case for aluminium, which Goldman believes is in the early stages of a multi-year bull market.
The third reason is the broker's belief that South32's shares will yield fully franked, double-digit dividend yields in the near term.
Goldman recently pencilled in dividends per share of 29 US cents in FY 2022 and 31.9 US cents in FY 2023. Based on current exchange rates, this will mean 40 cents and 44 cents in Australian currency.
So, with the South32 share price fetching $3.32, this equates to fully franked yields of 12% and 13.2%, respectively, over the next 24 months. This is significantly better than the market average and anything you'll find with term deposits or savings accounts.
What did the broker say?
Goldman explained why it is bullish on the South32 share price.
It commented: "We retain our Buy rating (and keep S32.AX on the ANZ Conviction List) on: (1) Valuation: The stock is trading at 0.92x NAV (A$3.75/sh). (2) Strong FCF outlook: We forecast a FCF yield of c. 15-18% in FY22 & FY23 (over 20% at spot), driven mostly by higher base metal prices (combined c. 70% of FY22 EBITDA). Spot EBITDA is over US$3.8bn vs. our base case c. US$3.0bn estimate. (3) Increased capital returns: We assume the buyback continues to be extended (at US$250mn p.a) and S32 continues to pay out 70% of earnings (40% ordinary, 30% special dividend component). On our estimates, S32 is on a dividend yield of c. 12-13% in FY22 & FY23."
