The outperforming South32 Ltd (ASX: S32) share price will please its shareholders, but it also dampens one of its key attractions to potential investors – its dividends.
As the price of an ASX share increases, its dividend yield falls as both move in opposite directions. Some might wonder if the South32 dividend still looks alluring after the miner's share price jumped around 5% in the past month.
That compares with a 3% drop in the S&P/ASX 200 Index (ASX: XJO) over the same period. This means South32 has outpaced the market by an enviable 8%.
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What is South32's dividend worth today?
That's good news for those who bought the shares in August. Not only did they enjoy the capital upside, but they could lock in their South32 dividend yield at around 7% before franking.
This is based on Citigroup's US 20 cents a share dividend forecast for FY23. This translates to around 28 Australian cents.
The good news for those looking to buy South32 shares today is that they can still get a 6.8% net yield even after the recent share price rally. If you qualify for the franking credits, the gross yield will jump to just under 10%.
No real consensus
But there are a few factors that could influence the yield. The dividend forecast could be off the mark as there is variation between brokers on South32's dividend outlook.
For instance, Macquarie Group Ltd (ASX: MQG) is tipping an FY23 dividend of US 23.5 cents a share. Goldman Sachs is pencilling in US 26.4 cents a share. These estimates include special dividends.
However, it is the FY24 forecast that could create some concern. While Goldman and Citi expect South32's dividend per share to keep rising, Macquarie expects this to fall to US 20 cents a share in the next financial year.
South32's dividend tied to the US dollar
The other factor that may have a material impact on South32's dividend yield is the exchange rate. The miner declares its dividends in the US currency. That's because the commodities it sells are in US dollars.
The weak Aussie versus the greenback is giving South32 extra "oomph". But if the trend reverses, this will eat into the seemingly high South32 dividend yield.
More than one way to skin a cat
The final thing to remember is that dividends aren't the only way companies can return excess capital. South32 announced a US$250 share buyback when it released its FY22 results last month.
This is a result of its strong free cash flow as high commodity prices have left its coffers overflowing. South32 has more cash than it needs for its operations. That is why it has decided to launch the buyback on top of its special dividend.
South32 could undertake further buybacks, depending on how well commodity prices hold up and the miner's cost control abilities.
Buying back shares reduces the total number of its shares. When it comes time to share the dividend pool, fewer shares mean a higher dividend per share payment.
