Pilbara Minerals Ltd (ASX: PLS) shares have boomed over the past year. It's up by over 60%. But, can the ASX lithium share turn into a great ASX dividend share?
The business hasn't even paid a single dividend yet, so some investors may feel it's a little early to be calling Pilbara Minerals a potential dividend darling.
However, all of the major ASX mining shares that are now strong dividend payers started off with no dividend history. I'm mainly talking about the main ASX iron ore shares of BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).
Let's address what the company has said about its dividend policy.
Image source: Getty Images
Pilbara Minerals shares its dividend plans
A few months ago, the ASX lithium share revealed its capital management framework.
It announced that favourable market conditions and strong operating margins supported the establishment of an inaugural dividend policy.
The capital management framework is designed to establish an "appropriate structure that prudently allocates available capital between investment into the existing business, sustainability commitments, strategic growth opportunities, as well as the provision of sustainable returns to shareholders."
Pilbara Minerals plans to target a dividend payout ratio of 20% to 30% of free cash flow to start with. The inaugural dividend payment is going to start in FY23, which is the current financial year.
This level of payment "reflects the early stages of Pilbara Minerals' growth cycle, with the remaining cash flow to be allocated to organic and inorganic growth opportunities which are aligned with the company's growth and diversification strategy to deliver long-term shareholder value."
The dividends are expected to be fully franked because it will start paying income tax in February 2022.
Remember, in the three months to 31 December 2022, it finished with a cash balance of $2.23 billion.
How big could the dividends be in the next 3 years?
As Pilbara Minerals said, the dividend is going to be set based on how much profit it generates.
Commsec estimates suggest that the annual dividend per share could be 15 cents in FY23 and in FY24. Hence, at the current Pilbara Minerals share price, it could pay a grossed-up dividend yield of 4.4% in the current financial year and the next financial year.
However, the profit is projected to drift lower to FY25. Commsec forecasts suggest that FY25 earnings per share (EPS) could be 50 cents. This could mean the dividend per share is 10 cents, which could be a grossed-up dividend yield of around 3%.
Will Pilbara Minerals shares become a dividend darling?
The fact that it's a commodity business would suggest to me that it's not going to be the type of business that can grow its dividend every single year. Resource prices can move up and down quite significantly, so the net profit is not likely to be consistent.
However, with the likely long-term growth of demand for lithium due to electric vehicles, the company plans to invest in improving its production and become involved with more of the lithium value chain. I think it can improve its profit margins in the coming years.
Unless the lithium price completely sinks, I think Pilbara Minerals is about to embark on many years of (at least) decent dividend payments. However, I'd hope to buy the Pilbara Minerals share price at a lower level because of its recent strength.
