ASX lithium share Pilbara Minerals Ltd (ASX: PLS) has started paying dividends to investors after a long journey of building towards production. However, the lithium price has sunk, so is it possible for it to still be a good ASX dividend share?
In FY23 the company paid an annual dividend per share of 25 cents. At the current Pilbara Minerals share price, the trailing fully franked dividend yield is 6.5% or 9.3% grossed-up.
Dividend policy
Firstly, I think it's worthwhile to look at what Pilbara Minerals has actually said about its dividend intentions.
It said that its target dividend payout ratio was established at 20% to 30% of free cash flow.
The company said this capital management framework was 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 has a huge cash pile
At the end of the FY24 first quarter, the ASX dividend stock had $3 billion of cash. That could be enough to pay a huge dividend, right?
Well, a lot of Pilbara Minerals' money is earmarked for its growth initiatives, such as the P680 project, P1000 project, the downstream joint venture with POSCO, the mid-stream project with Calix Ltd (ASX: CXL), further investment into sustainability commitments and initiatives, and potential investments in new downstream lithium chemicals opportunities (likely in partnership with parties involved in the battery materials industry). That's a big list of things that require capital.
So, we shouldn't rely on the company's existing cash to fund the dividends. However, future profit generation could fund future payouts.
But, that's difficult with a lower lithium price.
Can it still make profit and be an ASX dividend stock?
Mining costs don't change much month to month, so any extra revenue is largely a boost for the net profit. Any reduction in the commodity price largely cuts into net profit.
It seems FY24 is very likely to see lower profit than FY23. But it can still make a profit.
In the FY24 first quarter, the realised price per tonne of spodumene concentrate was US$2,240, and the unit operating cost (CIF) was US$658 per tonne. While the lithium price has continued to decline and is fairly close to US$1,100 per tonne (according to UBS), there's still room for Pilbara Minerals to make an operating profit.
A few weeks ago, UBS suggested Pilbara Minerals will see negative free cash flow until FY26, which is why the cash position is estimated (by UBS) to drop to A$900 million by June 2025 as it invests heavily.
What might the Pilbara Minerals dividend be in FY24?
If the dividend is linked to free cash flow and Pilbara Minerals makes negative cash flow then it's possible shareholders may not see a dividend for the next year or two. Is it still an ASX dividend stock if that happened?
The estimate on Commsec suggests Pilbara Minerals might pay an annual dividend per share of 5.4 cents in FY24 and 7 cents per share in FY25, which would be grossed-up dividend yields of 2% and 2.6%, respectively.
It may pay a dividend, but the ASX lithium share's large dividend payments may be paused for now, or at least until better lithium prices return.
