SunCoke Power (NYSE: SXC) is the biggest impartial provider of coke in North America. Earlier than you begin getting psychological photographs from Scarface, bear in mind, coke is a fabric that’s made out of coal and used to make metal.
SunCoke Power introduced right this moment that it’ll launch earnings on November 1. I’ll be trying on the numbers fastidiously to see how they’ll have an effect on the corporate’s Security Web score.
After rising steadily for a few years, SunCoke Power’s free money circulate topped out in 2021. It dipped ever so barely final 12 months – from $134.5 million to $133.4 million. This 12 months, nevertheless, free money circulate is projected to drop to $119 million.
The Security Web mannequin has an enormous downside with declining money circulate. Like most airplane seats, Security Web permits no wiggle room. If free money circulate declines by a greenback, the inventory will get downgraded.
Nonetheless, SunCoke Power has raised its dividend in every of the previous two years, together with an enormous 25% increase in August. The present quarterly dividend of $0.10 per share equates to an annual yield of 4.1%.
And fortuitously, regardless of its declining money circulate, the corporate has loads of money to pay its dividend.
Its payout ratio (the share of free money circulate that’s paid out in dividends) was a really low 18% final 12 months, and that determine is forecast to stay the identical this 12 months.
I prefer to see a payout ratio of 75% or decrease. That provides me confidence that the corporate can maintain its dividend going ahead.
If free money circulate stays the identical in 2024, the payout ratio can be a still-low 28% – even with the corporate paying the brand new $0.10 dividend for all 4 quarters relatively than simply two (as is the case this 12 months).
However I haven’t talked about one other obvious mark on SunCoke Power’s report that could possibly be the kiss of demise for its dividend security: In 2016, it eradicated its dividend solely, and it didn’t begin it up once more till 2019.
That’s not signal in any respect.
Now, SunCoke Power does have a fairly good monitor report of beating analysts’ earnings expectations. It has reported better-than-expected earnings in 12 of the previous 16 quarters, together with every of the final 4.
If earnings do are available in stronger than anticipated, that might increase this 12 months’s free money circulate estimate above final 12 months’s whole, which might end in an improve for the inventory.
I’ll be watching intently in early November to see whether or not that’s the case. However till then, I’ve no alternative however to stay skeptical.
The state of affairs with SunCoke Power is attention-grabbing as a result of the corporate can simply afford its present dividend. However an organization can’t have declining money circulate endlessly with out it affecting the payout to shareholders. And that gaping three-year gap when the corporate didn’t pay a dividend reveals that administration received’t hesitate to chop the dividend once more if it has to.
To be clear, I don’t count on SunCoke Power to chop its dividend within the close to future. But when issues don’t enhance, a discount may actually be on the horizon.
The earnings outcomes and steering that can be launched in a couple of weeks can be very revealing.
Dividend Security Ranking: D
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