Spring Sale
The global nuclear market is heating up again. A decade of low uranium prices following
Japan’s Fukushima nuclear disaster of 2011 is giving way to a new era of high nuclear demand, firmer prices, and potential supply shortages. Uranium mining giant Cameco (TSX:CCO) stock delivered 287% in investment returns over the past three years to claim a spot among growth stocks. However, the company’s current annual dividend yields a paltry 0.2% today. Could dividend growth follow?
Cameco started the long walk on a dividend growth path this year. Management raised the 2023 dividend by 50% in February. However, the $0.12 per share annual dividend payout due in November yields an insignificant 0.2%. The payout could grow with a higher uranium price; however, the dividend’s growth rate may not be as high as some investors may wish.
Why investors expect dividend raises on Cameco stock?
Cameco’s revenue, earnings, cash flow, and dividend payouts are tied to uranium prices, and internal productivity, and both variables look favourable going forward.
The company used to pay out a quarterly dividend of $0.10 per share back in 2011. Uranium prices on long-term contracts averaged US$66.79 per pound at the time, and Cameco sold 32.9 million pounds at an average realized price of US$49.17. Operating results were satisfactory, and management approved a $0.40 annual dividend.
Owing to rough uranium markets during the past decade, Cameco cut its dividend to $0.08 per share annually for 2017. Uranium spot prices had dipped below US$18 a pound and realized prices dropped to US$36.13. The company curtailed production to preserve the value of its reserves and produced just five million pounds of uranium by 2020 (down from 22.4 million pounds in 2011). The business was in survival mode. Management spared the token dividend clearly to maintain Cameco’s dividend stock status.
Uranium demand boost
Fast forward to 2023, and uranium prices have recovered to decade highs. As one can read from Cameco’s uranium price dataset, at US$71.58 per pound for September 2023, Uranium market prices are back at levels last seen in January 2011 – before the Fukushima nuclear disaster.
A resurgence in uranium prices allowed Cameco to restart production in 2022. The company expects to match 2011 deliveries (of almost 33 million pounds) in 2023 at average prices around US$63.80 (above 2011 thresholds). Cameco should report revenue and earnings much higher than its 2011 figures this year, and do even better next year.
Investors justifiably expect dividend raises on Cameco stock going forward.
Will Cameco raise dividends as uranium prices soar?
Cameco is back in the cash flow generation game in a big way, and dividend growth could follow. Strong revenue growth and lower costs of sales could boost the business’ free cash flow, allowing more room for dividend raises. However, huge capital outlays in the near term may delay dividend increases.
Production restarts at Cameco’s low-cost mining assets since 2022 should double internal production from 10.4 million pounds in 2022 to surpass 20 million pounds of uranium in 2023. Management expects average realized prices to surge from US$44.73 per pound in 2022 to US$63.80 this year. Bay Street analysts project a 33% year-over-year surge in Cameco’s revenue in 2023. The business has higher discretionary cash flow to support dividend raises.
That said, Cameco may ignore dividend raises and instead focus on growing production operations and closing a key acquisition in the near term.
Vertical growth
In a partnership with Brookfield Renewables Partners, Cameco is in the process of acquiring a 49% stake in nuclear services giant Westinghouse Electric this year. The company has a US$2.2 billion acquisition bill to settle any time during the fourth quarter of 2023. Add to this the costs or restarting production at key sites and hiring more talent, and Cameco may prioritize growing the business and paying down debt, to significantly raising dividends to stock investors.
Cameco held $2.5 billion (US$1.8 billion) in cash, cash equivalence, and short-term investments by June 30, 2023. The Westinghouse Electric deal will gobble cash and increase debt, while management may prioritize strengthening the balance sheet by preserving cash flow – that is, delaying significant dividend raises.
What’s more? Given a strong uranium market, Cameco has ample investment opportunities to efficiently reinvest internally generated cash flow back into the business and generate higher returns than its cost of capital.
Huge dividend raises may rank lower on management’s priority list right now. I would expect a token increment for 2024.
