Labrador Iron Ore Royalty (TSX:LIF) stands out on the TSX as a inventory identified for its beneficiant dividend yield, presently sitting at a formidable 10% as of writing. This yield is considerably above the market common and makes LIF an interesting possibility for income-focused traders. However is it purchase? Let’s dive deeper into its current earnings, previous efficiency, future outlook, and dividend sustainability to reply this query.
Into LIF
The corporate’s construction is exclusive as a royalty-focused entity, deriving revenue from iron ore manufacturing quite than working mines itself. This enterprise mannequin permits LIF to keep up comparatively low working prices whereas offering constant royalty revenue. Nonetheless, it additionally means the dividend inventory’s fortunes are closely tied to world iron ore costs, which might be unstable.
In its most up-to-date earnings report for Q3 2024, LIF posted internet revenue of $33.6 million, or $0.53 per share, reflecting a notable 32% year-over-year lower. This drop was largely resulting from decrease realized costs for iron ore and decreased gross sales volumes, as world demand softened in response to slower financial progress, significantly in China. Income additionally declined, marking an 11.6% drop from the identical quarter the earlier 12 months. Whereas these outcomes aren’t stellar, the dividend inventory’s profitability stays robust, with a revenue margin of over 94%.
Through the years, LIF has constructed a repute for persistently excessive dividend payouts. The present ahead annual dividend price of $3.00 per share yearly stays aggressive, particularly in comparison with different shares within the fundamental supplies sector. Traditionally, LIF’s dividend yield has averaged round 9.6% over the previous 5 years, sometimes climbing as excessive as almost 20% throughout occasions of excessive iron ore costs.
Future concerns
By way of previous efficiency, LIF has skilled earnings progress in growth years when iron ore costs surged. Nonetheless, lately, the dividend inventory’s earnings have been declining at a median annual price of 1.9%, even because the broader metals and mining sector grew at a strong 23.8% yearly. This underperformance relative to the business may very well be a purple flag for potential traders.
Trying forward, the worldwide iron ore market faces some uncertainty. Demand from China, the world’s largest shopper of iron ore, has been unpredictable resulting from slower financial progress and fluctuating metal manufacturing. In the meantime, provide dynamics, together with elevated manufacturing from main miners, may put extra strain on costs. These elements create a difficult surroundings for LIF, as its income is instantly tied to each the amount of iron ore produced and the costs at which it’s offered.
On the steadiness sheet, LIF seems strong with a money reserve of $40.3 million and no reported debt. Its present ratio of 1.5 signifies a wholesome capability to cowl short-term obligations, including a layer of monetary stability. Nonetheless, the shortage of serious progress investments may restrict long-term prospects, significantly if iron ore costs stay subdued.
Backside line
LIF’s dividend stays its most compelling characteristic. For these searching for rapid revenue, it’s equally vital to judge whether or not this excessive yield might be sustained within the coming years, particularly given the dividend inventory’s earnings volatility and excessive payout ratio.
Altogether, LIF inventory presents a gorgeous dividend yield and a steady royalty-based revenue mannequin, making it an interesting possibility for traders prioritizing passive revenue. Nonetheless, its dependence on iron ore costs and lack of earnings progress in comparison with the broader sector pose dangers. Buyers ought to weigh these elements rigorously, particularly in the event that they’re counting on LIF for long-term revenue. Diversifying with different dividend shares could assist steadiness the potential volatility related to LIF.
