Randgold’s income attractions are shining through

In my view, dividend investing is about more than simply buying a handful of high-yielding shares. I focus less on yield than most dividend investors and more on dividend growth. A long-term investment horizon dictates that a stock which can grow dividends quickly may be worth more than a company with a high yield. Fast-rising dividends can signal management confidence and push a company’s shares higher, as well as provide a high income return in the long run.

Given predictions of significantly higher inflation in the coming years, companies which quickly increase dividends could see their valuations rise in my opinion. One of my holdings, Randgold Resources (LON:RRS), raised its dividend 52% this week. I believe it could become a genuine rival to the dividend ‘aristocrats’ over the long term.

Growth, growth, and more growth

Gold has experienced a rough ride since Trump’s election win. However, this hasn’t held back Randgold Resources. In FY2016 it registered a rise in EPS of over 30% as falling costs and rising production delivered ‘positive jaws’. This enabled a 52% rise in dividends, which was a lot more than the market was anticipating. As well as the company delivering on its target of having a net cash position of over $500 million, this helped to push its shares around 4% higher on the day of release.


Even though it has increased dividends by more than 50% to $1 per share, this gives the company a payout ratio of 38%. In my view, its dividends could move significantly higher for two main reasons.

First, Randgold Resources has no debt and a cash position of $516 million. This should provide a significant amount of investment capital for its 10-year plan, which includes the development of three mines over the next five years. This may allow for a higher payout ratio than today. Second, the company’s EPS is forecast to rise at an annualised rate of 19.5% in 2017 and 2018. All of this growth could be passed straight on to shareholders in the form of higher dividends.

Golden appeal

Those figures could depend on gold increasing in price over the medium term. In my view, gold will rise significantly between now and the end of 2018. Many of the factors required to have a period of higher gold prices are present.

For example, the USA is expected to unveil higher spending plans. They are likely to cause a higher budget deficit as well as rising debt levels. The policies pursued by Trump could cause uncertainty, while Brexit may do likewise. In such a situation, where volatility and inflation move higher than today, gold may become an exceptionally popular asset.

Many of the factors required to have a period of higher gold prices are present.

Sure, the Federal Reserve’s plan to adopt a more hawkish stance could keep the gold price pegged back at times. However, I doubt the Fed will a) be able to keep pace with Trump’s ambitious spending plan and its effect on inflation, given time lags; and b) will not have the scope to do so in the short run. Inflation is stubbornly low and employment figures are not strong enough in my view to warrant a more hawkish stance.

Given Randgold Resources has been able to cut total cash costs per ounce to $639 in 2016, reduce its lost time injury frequency rate to its lowest ever level and raise production in each of the last six years, I believe its long-term prospects are encouraging. They should provide it with plenty of scope to raise dividends at a relatively large multiple of inflation in future years.

The right environment

As alluded to, 2017 could be the year when inflation takes investors by surprise. Although forecasts of 4%+ have been around for several months, investors may not yet have adapted to the potential for a sustained period of higher inflation.

This could cause negative income returns on a real-terms basis from historically popular income shares for a number of years. I feel there may be a rotation of sorts towards stocks with faster-growing dividends and relatively resilient business models. They should provide stability and a counterweight against the volatility which is likely in the years ahead.


I’d argue Randgold Resources fits that bill. It may have a P/E of 32, but its EPS growth of almost 20% per annum and the potential for a higher gold price mean it is worth a premium valuation in my view. Its dividend yield of 1.1% may be lower than inflation and less than a third of the FTSE 100’s yield of 3.7%. But with the growth in its dividend in 2016 and the potential for more dividend growth in future years, it could become a relatively high-yielding share.

Therefore, it may be of interest to investors concerned about the effect of a period of higher inflation on their earnings. Further, such a fast-growing dividend could signal confidence in the company’s management regarding its future outlook. This could act as a catalyst for its share price.

Outlook

In my view, dividend investing has much more appeal than many investors realise. It not only provides a higher income return, but fast-rising dividends can also act as a catalyst for a company’s share price. Therefore the total returns on offer, when compounded over a multi-year period, could be well in excess of the index returns.

Randgold Resources could appeal to income investors seeking a stock which has a relatively low positive correlation with the rest of the index during what may be an uncertain period.

I believe Randgold Resources is a highly appealing dividend investment. Its yield may be relatively low today, but the potential for high dividend growth is made possible by its EPS forecasts, low payout ratio, net cash position and the prospect of a higher gold price.

Further, Randgold Resources could appeal to income investors seeking a stock which has a relatively low positive correlation with the rest of the index during what may be an uncertain period. I’d rather own it than a dividend ‘aristocrat’ for the long term, since it may be better suited to a new era of sustained higher inflation and greater uncertainty.