[Wealthy Retirement reader] Jim C. wants to know how safe the 6.6% dividend yield is from Freeport-McMoRan Inc.(NYSE: FCX).

Freeport-McMoRan’s shares have been crushed over the past seven months alongside the prices of commodities and oil. From a high of $39.32 last summer, the stock hit a low of $16.43 just a few weeks ago.

Adding to the pain, Freeport-McMoRan reported fourth quarter 2014 earnings on January 27. It missed analysts’ earnings estimates despite beating handily on revenue.

In order to deal with the precipitous decline in commodities prices (and earnings), the company hacked its 2015 capital expenditures plan by $1.5 billion. That’s billion with a “B.”

[ad#Google Adsense 336×280-IA]But it may not be enough to stem the bleeding.

At the close of 2014, Freeport-McMoRan had $19 billion of debt on its books.

Much of the debt is a result of the company’s attempt to diversify through its acquisition of two oil and gas companies in 2013.

Not surprisingly, with oil prices down about 50% since that time, those acquisitions aren’t working out so well.

Since the acquisitions, management has attempted to reduce the company’s debt load to $12 billion by the end of 2016.

Blaming commodities prices, Freeport-McMoRan backed down from its previous debt reduction targets, calling 2015 a “bridging year.”

Freeport-McMoRan sold $5 billion in assets, including the $1.8 billion sale of its Candelaria/Ojos del Salado mining operations in the fourth quarter of 2014. More asset sales could be on the horizon, but would likely not be as lucrative in the present environment of low commodity and energy prices.

And it doesn’t get much better from here.

It’s All About the Free Cash Flow, Baby

Freeport-McMoRan’s free cash flow has been declining for the last three years.

Last year, its free cash flow was negative to the tune of $1.58 billion. Falling free cash flow is never a good sign, but negative free cash flow is even worse. This means the company did not make enough cash to fund the business, let alone the dividend.

Wall Street analysts don’t expect free cash flow to improve much in 2015. Most are bearish on Freeport-McMoRan’s prospects. There have been a number of downgrades over the past few weeks. The Street expects the company’s 2015 free cash flow to be negative again – at $1.42 billion. In fact, analysts don’t expect Freeport-McMoRan to return to positive free cash flow until 2016.

At the end of 2014, the company had just $464 million in cash and equivalents on its balance sheet. This is down from almost $2 billion the year before.

In the fourth quarter, it also declared a cash dividend of $0.3125 per share. But with a price tag of $1.3 billion to pay the dividend this year, negative free cash flows and just $464 million in the bank, it is highly unlikely the dividend can continue as is.

Will History Repeat?

To top it off, Freeport-McMoRan has a choppy dividend history. The company actually eliminated the dividend in late 2008 following the last commodities bust.

Also reminiscent of 2008, in January, management presented a plan that included a continuation of the company’s current dividend policy. However, President and CEO Richard Adkerson left the door open to a future cut or more.

“And I think you can judge from our past history that our Board’s going to be prepared to do what’s necessary to protect the liquidity of this company,” Adkerson said.

While management tried to assure investors that they plan to continue paying the dividend, their assurances included a pretty big “if”: if commodity prices stop declining.

They also included a pretty big “but” by deferring the decision to the board of directors and their efforts to preserve liquidity.

As the saying goes, “If ‘ifs’ and ‘buts’ were candies and nuts, we’d all have a Merry Christmas.”

For now, a bet on the safety of Freeport-McMoRan’s dividend is a bet on commodities prices.

Even management has admitted there are uncertainties about future prices.

The company has already aggressively cut spending to preserve cash. Cutting or eliminating the dividend is the next logical step.

Dividend Safety Rating: F

— Kristin Haugk

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Source: Wealthy Retirement