South32 Ltd (ASX: S32) shares have been through plenty of volatility over the past two years. But, could investors be comforted by the fact that the business sometimes pays larger dividends?
For readers that don't know what South32 does, it's a very diversified global mining business. It produces a number of commodities including bauxite, alumina, aluminium, copper, silver, lead, zinc, nickel, metallurgical coal and manganese from its operations in Australia, Southern Africa and South America.
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How much dividend income is the business going to pay?
If we look at the last two dividends declared by the ASX mining share, it amounts to a grossed-up dividend yield of 10.6%. Investors have received a lot of dividends since the start of 2022.
But, the annual dividend per share is expected to reduce significantly during FY23 compared to FY22.
Commsec numbers currently suggest that South32 is going to pay a total dividend per share of 19.3 cents. This would be a grossed-up dividend yield of 6.3%.
So, what I'm trying to show is that the trailing dividend yield may be a bit of an illusion because the dividends are expected to reduce this year.
Why are the dividends reducing?
The performance of a miner can be heavily influenced by how commodity prices move. The higher revenue from a stronger commodity price largely adds to net profit after tax (NPAT) and operating cash flow.
However, when commodity prices fall it can largely hurt net profit and operating cash flow.
In the FY23 half-year result, we saw South32's profit after tax fall 34% to US$685 million, while underlying earnings sank 44% to US$560 million. That's not helpful for the South32 share price.
The business saw "strong production results", though commodity prices "retreated from record levels." There was production growth of 12%.
However, the company did say that its long-term outlook is "positive as a result of its portfolio investments and high-quality development options in the metals critical for a low-carbon future."
Projections
However, while FY23 dividends are expected to reduce, payments to shareholders could then grow in FY24 to 22.2 cents per share. This would be a grossed-up dividend yield of 7.3%.
Then, another good increase could occur in FY25 if the ASX mining share is able to generate the forecast earnings per share (EPS) of 52.9 cents. The FY25 annual dividend per share could be 26.7 cents, which would be a grossed-up dividend yield of 8.75%. So, not as good as FY22, but the yield could steadily climb after FY23.
The South32 share price is up over 20% in the past six months, so it may not be the most opportunistic time to buy shares. But, I do like the diversification it offers and the increasing exposure to commodities involved with a low-carbon future.
