Cameco (TSX: CCO) is one of Canada’s premier uranium companies. It supplies not only uranium but also usable nuclear fuel.
While many people call nuclear energy “uranium energy,” the fact is that uranium needs to be enriched and shaped into a convenient rod-like form before it can be used at nuclear power plants. These rods are referred to as “nuclear fuel.” An entire city can be powered for many decades by a single one of them that could fit inside your house!
Cameco excels at mining and extracting uranium as well as converting it to usable nuclear fuel. It sells such fuel to nuclear power plants. The process consists of three phases: mining, conversion, and fuel manufacturing. CCO makes money at each phase of the nuclear fuel life cycle.
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Uranium rallies
The fact that Cameco makes nuclear fuel is intriguing, because uranium (the commodity nuclear fuel comes from) is currently rallying. Since the start of the year, it has risen from $48.9 to $81 — a 68% change. The higher the price of uranium goes, the more valuable Cameco’s product becomes, and the higher the prices it can sell for. This increase in the price of uranium has benefited CCO’s earnings this year. In its most recent quarter, the company delivered the following:
- $575 million in revenue, up 78%
- $148 million in net income, up 858%
- $0.34 in earnings per share, up 780%
- $127 in operating income, up 581%
In its third-quarter earnings release, Cameco’s management explicitly attributed its rise in earnings to the rise in uranium prices. This makes sense, because uranium and related services are the main things that Cameco sells. If uranium prices remain high, then CCO will see its earnings continue to rise. It may even be able to increase its dividend. Currently, Cameco pays a $0.12 annual dividend, with a mere 17% payout ratio. If this company’s earnings simply don’t decline, it can afford to raise its dividend. If its earnings keep rising, then it can afford to increase its dividend by large percentages.
A 0.19% dividend yield
One thing is certain: for Cameco to be seriously interesting as a dividend play, its yield will have to go higher. The stock only yields 0.19% right now. That’s such a small amount that if you invest $100,000 in the stock, you’ll get a mere $190 per year in dividends in return! It’s a pretty paltry dividend now, but if uranium keeps rallying, that could change very quickly.
Could it go higher?
The trouble with trying to gauge whether Cameco will raise its dividend significantly is that it all depends on a commodity price. Commodity prices are notoriously difficult to predict. Unlike stocks, commodities don’t produce earnings or cash flows, so they can’t be valued by ratios or discounted cash flows.
Right now, we just don’t know whether uranium prices will keep rising. What we do know is that Cameco’s payout ratio is presently extremely low. If uranium simply stays at the price level it’s at now, then the company’s next few quarters will show positive earnings growth, and it will have plenty of room to raise its payout. So, investors have some cause for being optimistic that CCO stock will pull off a moderately sized dividend increase. Betting on a large increase wouldn’t be wise.
