Newmont Stock’s Cash Dividend Trounces Treasury Bonds (NYSE:NEM)

Newmont (NYSE:NEM) is throwing off a 4.6% trailing dividend yield at $48 per share, above the current rates available from Treasury bond investments. This relative yield to the Treasury market is the highest in my 36 years of trading the company. The upside story is rising gold prices in 2023-24 could support dividend payout raises, as income and cash flow roars ahead. In the end, a rising dividend yield with dollar devaluations almost sure to come in future years could translate into better yields and price appreciation in the company, considering 20-30 years of economic precious metals reserves owned all over the world.

Compared to a “fixed” coupon dividend from bonds with a guarantee you will get debased dollars returned to you at maturity many years down the road, Newmont clearly offers the potential for far better total returns over a number of years, just like has been achieved since 2018.

Smart dividend and income investors should seriously consider overweighting Newmont in their portfolios. I rate the stock a Strong Buy under $50 per share. Here’s why…

Dividend Story

As I write this story, Newmont is providing the highest dividend yield in the major gold/silver miner sector on Wall Street. In addition, near record levels of free cash flow could mushroom on any large precious metals upmove in 2023, supporting a raise in the dividend by the second half of next year. My latest article explaining reasons for gold bullion bullishness was posted a few days ago here.

The trailing, regular 4.6% annual cash distribution yield ran almost double the median industry average closer to 2.5%. My comparison group includes miners Barrick Gold (GOLD), Agnico Eagle (AEM), Anglogold Ashanti (AU), Gold Fields (GFI), Kinross (KGC), Pan American Silver (PAAS), Hecla (HL), plus streamers Franco-Nevada (FNV), Wheaton (WPM), and Royal Gold (RGLD).

The Newmont dividend rate is TRIPLE the equivalent payout from the U.S. stock market. Below is an illustration contrasting NEM’s 4.6% yield with the SPDR S&P 500 ETF (SPY) at 1.65%, iShares Russell 2000 ETF (IWM) at 1.48%, and Invesco NASDAQ 100 ETF (QQQ) at 0.8%.

Versus sharply rising Treasury rates in 2022, the Newmont yield has risen just as fast on the slide in its quote during the past eight months. 4.6% from the company stands above basically the entire Treasury maturity curve, at a record 40-year high inversion spread. The Treasury inversion of late 2022 is likely forecasting a drop in economic activity next year (recession) and less immediate demand pressure in the economy supporting inflation grinding higher (at least over the next six months). If such plays out during early 2023, the likelihood of falling Treasury yields makes the Newmont story even more lucrative.

Of course, gold tends to rise from the beginning of a recession to its end point (almost always since leaving a gold standard for dollars in the early 1970s), as monetary metals begin to discount the resumption of easing policy by the Federal Reserve. An eventual Fed “pivot” will also usher in future dollar devaluations on extra money printing efforts. My view is banking-cycle history repeating itself makes the strongest argument of all to buy gold and successful miners of the stuff like Newmont now.

What about dividend sustainability? We can review the level of cash flow and “free” cash flow (FCF is money not needed to pay bills, spend on plant & equipment replacement, reinvest in new resource discovery and production, or otherwise sustain the business) churned out by Newmont in 2020-22 easily supports the current dividend payout of roughly $1.7 billion annually. Assuming gold prices rebound dramatically next year (my 12-month forecast is US$2,500 gold), enormous cash flows beyond the 2021 peak are approaching. $6 billion per year in regular accounting cash flow and $4 billion in free cash flow are numbers within the realm of possibilities, sooner rather than later, if my gold price projection is hit.

Having said that, in early November management hinted at a slight dividend cut in future quarters (Q3 Earnings Transcript) if the gold price did not quickly recover in early 2023, using a sliding scale for dividends based on free cash flow (which was light between July-September) and the existing gold quote (a 28-month low back then).

Finally, Seeking Alpha gives Newmont one of its best overall dividend grades in the precious metals sector. If you are an income-hungry investor searching for safety and inflation hedge characteristics, shares of this Colorado-based company should be near the top of your due diligence list going into the new year.

Total Return Advantage

Believe it or not, Newmont has generated a total return, including the dividend and share price appreciation, about the same as the S&P 500 over the last five years, pictured below. The +50% NEM total return was only slightly less than the +56% SPDR S&P 500 ETF result. With leverage to gold owning decades of inground reserves, intelligent limited-debt management of its assets, and a rising dividend payout, gains have also bested the gold bullion increase in value of +38% over the same span, represented by SPDR Gold Shares (GLD).

Considering the general price level in the U.S. economy has risen around +20% since early 2018, flat Treasury bond total returns have been a complete disaster. Those holding iShares 20+ Year (TLT), 7-10 Year (IEF) and 1-3 Year (SHY) Treasury Bond ETF products over 5 years are not happy campers. Investors buying and holding maturities from 1-year to 20-years have witnessed no (or minor single-digit) nominal gains, and lost around 20% in purchasing power in the real world (before taxes mind you)!

If 2021-22 is our inflationary future, do you really want to hold Treasury bonds for more than a 6-month trade? I am asking myself this question daily, after moving 25% of my investments since November into long bonds as a “disinflationary” recession hedge (speculative trade) into Q1 or Q2 2023.

Again, for buy-and-hold types with a 5-year or greater horizon, Newmont appears to be a top risk-adjusted income idea. Higher gold prices are a reaction to political chaos, recession fears, and central bank money printing – all reasons for local currency devaluations. Considering we now have more debt in aggregate (owed by consumers, corporations, plus federal, state and local government entities) vs. economic GDP output than any other time in America’s 250-year history, “soft defaults” on our debts with substantial inflation may be the easiest way forward to prevent a massive depression like the 1930s. My argument for financial experts and company leaders wanting low inflation is you need to be “careful what you wish for” as a recession begins. We may not have a “normal” recession for decades until debt levels are brought down.

Decent Valuation Setup

If we cannot escape record, experimental money printing levels moving forward during each new recession, inflation rates a few years out could be much higher than the 9% YoY CPI peak of 2022. So, hedging your wealth with gold assets paying high dividend yields currently could be one the most intelligent long-term moves you can make.

The good news is Newmont may be one of the best positioned for both total return and dividend seekers in the precious metals mining sector. Holding an impressive list of Tier-1 mines for size (reserves and production), low mining costs, and safer jurisdiction locations, Newmont also possess one of the strongest balance sheets and cash flow profiles.

The extraordinary bottom line for investors is this buy proposition has declined markedly in price during 2022 on short-term fears of Fed tightening and a related countertrend rise in the U.S. dollar’s value vs. foreign paper currencies. Today, ratios of price to trailing sales, cash flow, and tangible book value are trading near 10-year averages. You would think Newmont’s bright long-term future tied to inevitable price gains for precious metals (on devaluing dollar worth) would be valued at the high end of the range on trailing operating results. Remember, cyclical businesses usually trade at low valuations at share peaks and high valuations at cycle bottoms. So, getting a chance to buy Newmont assets near an average valuation at a 28-month low for gold is uniquely a long-term bargain setup for those paying attention.

Versus the peer group of major gold and silver miners, Newmont is expected to witness a slightly above-average increase in EPS after 2022’s decline tied to lower bullion quotes (and rising mining costs with general inflation globally).

When we include total debts and subtract cash holdings, enterprise value stats point to a better-than-typical industry backing by operating fundamentals. On “forward” estimates by Wall Street analysts, Newmont’s blue-chip (really industry leading) assets are valued slightly below median averages of cash EBITDA (earnings before interest, taxes, depreciation and amortization) and sales.

Upside Breakout Approaching?

Another positive for Newmont investors is the chart of trading activity highlights a pattern of washed out weak-hand holders (that couldn’t stomach a 50%+ price drop from April), with a base-like reversal appearing since July. I have drawn an 18-month chart below of daily price and volume changes, with some of my favorite momentum indicators.

You can review the interplay of the Average Directional Index, Negative Volume Index, and Chaikin Money Flow creations. All told, today’s trading pattern is quite similar to the December 2021 to early January 2022 arrangement, both instances marked with green arrows and boxes.

A reduced volatility 14-day ADX score describes a supply/demand marketplace for shares near balance. Gone is the heavy selling activity of the summer months. A rising NVI highlights real buying on weakness and during slower volume sessions. And, the 20-day CMF spike in December showcased the strongest level of bullish interest since early April.

Once the upper-$49 to $50 range is broken to the upside, technical traders and numerous long-term investors in the precious metals space will surely become excited about reacquiring a Newmont position. I have drawn with an orange line the late July price gap that has yet to be filled (dividend adjusted), providing real technical resistance during December.

Final Thoughts

Newmont remains an undervalued and unappreciated blue-chip play in gold mining, after the wicked price decline in the middle of 2022. I own a sizable stake and may add shares in coming weeks. The dividend story has become quite compelling since the summer selloff for contrarians and old-timers like myself that still believe gold has a place in portfolio allocation.

What could go wrong? Two scenarios come to mind as having the potential to keep Newmont’s share price down in 2023. The first is obviously a flat to lower gold metals price. If I am proven wrong (it does happen) and gold prices do not climb as fast as operating mine production costs, lower income and cash flow generation could appear. This in turn might bring a dividend cut, putting some pressure on the stock, maybe pushing quotes closer to $40 per share in 12 months. The other risk is the stock market generally continues to tank, which could drag Newmont’s price with it, no matter the direction of gold in the beginning of the year.

However, the upside potential in Newmont is so large (with a double to $100+ a share not impossible over 12-18 months), I am willing to grab the 4.6% dividend, then wait patiently for another round of money printing by the Federal Reserve to offset recession.

My theoretical worst-case scenario for the company includes a share quote of $30 in a stock market crash vs. best-case upside potential of $120 using $3000 gold in 2024. This modeling equates with -35% for total return downside “risk” vs. +150% for upside “reward” potential over the next couple of years. My view is some sort of price gain is the probable outcome by December 2023. The bonus is a dividend yield of almost 5% is incredibly appetizing when you step back and take an honest look at today’s investment alternatives.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.