Endeavour Mining (EDVMF), the West African gold giant, has long been a favorite among income investors, boasting a consistent and attractive dividend yield. But whispers of change are circulating. While headlines focus on the recent earnings miss, a deeper dive into the company's financial data reveals a subtle shift in strategy that could spell trouble for dividend devotees.

Endeavour's most recent quarterly report, ending March 31, 2024, paints a picture of financial stability. With a market capitalization exceeding $5 billion and over $4 billion in tangible assets, the company appears to be on solid ground. But a closer look at the cash flow statement raises eyebrows.

Despite a healthy operating cash flow of $159.3 million for the quarter, Endeavour's free cash flow plunged into negative territory, reaching -$123.9 million. This stark contrast between operating cash flow and free cash flow stems primarily from the company's aggressive capital expenditure program, which reached a hefty $179 million during the quarter.

This aggressive spending strategy signals a clear change in priorities. Endeavour seems to be favoring future growth over immediate shareholder returns. While this approach might benefit the company in the long run, it could come at the expense of its current dividend policy.

Endeavour's dividend yield currently stands at a respectable 3.96%, with an annual dividend rate of $0.81 per share. This represents a significant portion of the company's earnings, especially considering the recent earnings miss. In fact, the company reported a surprising -100% earnings surprise for the quarter, missing analyst estimates by a wide margin.

The combination of declining free cash flow, high capital expenditures, and an earnings miss raises serious questions about the sustainability of Endeavour's dividend policy. Can the company maintain its current dividend payout while simultaneously investing heavily in future growth?

Here's where the numbers get intriguing. Endeavour's payout ratio, a measure of the percentage of earnings paid out as dividends, currently stands at a relatively low 1.62%. This suggests that, at least on paper, the company has ample room to maintain its current dividend levels.

However, this low payout ratio is deceptive. It's heavily influenced by the recent earnings miss, which skewed the company's earnings per share significantly. If we analyze the trend in Endeavour's free cash flow, a different story emerges.

Over the past few years, Endeavour's free cash flow has been on a downward trajectory. While the company generated over $500 million in free cash flow in 2022, this figure dwindled to just $67.9 million in 2019. This declining trend, coupled with the recent surge in capital expenditures, paints a worrisome picture for dividend investors.

The Hypothesis:

Endeavour Mining is quietly shifting its focus from shareholder returns to future growth. The aggressive capital expenditure program, coupled with declining free cash flow, could eventually force the company to re-evaluate its dividend policy.

The Numbers:

Free Cash Flow: -$123.9 million (Q1 2024), $503.7 million (2022), $67.9 million (2019)

Capital Expenditures: $179 million (Q1 2024)

Earnings Surprise: -100% (Q1 2024)

Dividend Yield: 3.96%

Payout Ratio: 1.62%

Free Cash Flow Trend (2019-2024)

While Endeavour's management hasn't publicly hinted at any changes to the dividend policy, the financial data tells a different tale. This silent shift in strategy warrants close attention from investors, especially those reliant on Endeavour's dividend income.

"Fun Fact: Did you know that Endeavour Mining operates the largest gold mine in Burkina Faso? The Houndé mine, which began production in 2017, is expected to produce over 200,000 ounces of gold annually."