Amerigo Resources' (TSE:ARG) Dividend Will Be $0.03

The board of Amerigo Resources Ltd. (TSE:ARG) has announced that it will pay a dividend of $0.03 per share on the 20th of December. Based on this payment, the dividend yield on the company's stock will be 9.5%, which is an attractive boost to shareholder returns.

Our analysis indicates that ARG is potentially undervalued!

Amerigo Resources' Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the company was paying out 134% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 63%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Over the next year, EPS is forecast to expand by 57.7%. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 85% - on the higher side, but we wouldn't necessarily say this is unsustainable.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of $0.0384 in 2012 to the most recent total annual payment of $0.0874. This implies that the company grew its distributions at a yearly rate of about 8.6% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Amerigo Resources might have put its house in order since then, but we remain cautious.

Amerigo Resources Might Find It Hard To Grow Its Dividend

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Amerigo Resources has impressed us by growing EPS at 15% per year over the past five years. However, the payout ratio is very high, not leaving much room for growth of the dividend in the future.

Our Thoughts On Amerigo Resources' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Amerigo Resources' payments, as there could be some issues with sustaining them into the future. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 2 warning signs for Amerigo Resources that investors should take into consideration. Is Amerigo Resources not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.