Natural Resource Partners (NYSE: NRP) owns 20,000 square miles of land that it leases out to timber harvesters and miners of coal, oil, and gas. It doesn’t engage in exploration or pays any of the costs associated with extraction. It simply leases the land and collects royalties.

This small cap stock trades only about 19,000 shares a day but sports a 7% yield, making it known to only the most eagle-eyed of income investors.

The dividend safety rating on this one is complicated.

Free cash flow is likely to soar this year. However, last year’s $121 million figure, while higher than 2020s, was lower than both 2019’s and 2018’s figures. There are no estimates for 2022, but free cash flow is about $201 million over the trailing 12 months.

Even though this year’s free cash flow number is likely to be strong, Safety Net takes into account that last year’s free cash flow number is down from three years ago.

Natural Resource Partners currently pays a $0.75 per share quarterly distribution. A distribution is a little different from a dividend in that it consists of return of capital, which is not taxed as a dividend in the year it is received. Instead, the distribution lowers investors’ cost basis.

The company raised the distribution from $0.45 in May of this year but has made three distribution cuts since 2014, including completely omitting a payout in May 2020. It reinstated the distribution the following quarter. The current distribution is still 86% lower than where it was in 2013. Management reduced the payout to shore up the company’s balance sheet and reduce debt.

The payout ratio is quite low. Last year, Natural Resource Partners paid out just 19% of its free cash flow in distributions. And with free cash flow likely to jump, the payout ratio is going to be very low, even with the recent increase.

The stock gets a low distribution safety rating because the distribution has been slashed so many times in less than a decade. You have to believe management will cut it again if free cash flow declines.

But considering Natural Resource Partners’ strong free cash flow and low payout ratio, it’s hard to imagine a distribution cut in the next 12 months. But if free cash flow ever significantly declines, investors should be ready for a reduction in their distribution.

Dividend Safety Rating: D

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