Dividend-hungry investors has struck gold with major miners

Mining company dividends have surged on the back of higher commodity prices.

outlook: Leading miners, led by companies such as BHP, Rio Tinto and Fortescue Metals, have saved the day for dividend hungry investors this reporting season and should deliver strong payments next year if commodity prices remain stable.

Amid the cries of indignation from Telstra shareholders who were told dividend payments would be slashed, investors actually did very well this reporting season on the dividend front. Two-thirds of the market’s biggest companies — led by the miners — raised payouts, and the average company boosted dividends by 18 per cent.

Analysis of the reporting season by Don Hamson at Plato Investment Management showed it was resource stocks filling the top spots for the biggest increases in dividends.

And sometimes a higher dividend didn’t help the share price, with Domino’s Pizza and BlueScope Steel both ramping up their payments but triggering share price slumps as they disappointed investors with poor earnings outlooks.

Miner South32 “took the cake’’, according to Hamson, lifting cash dividends over 500 per cent and gross dividends rose even further, up 777 per cent.

Others to star included Oil Search (dividends up 230 per cent), BHP (193 per cent), Rio (133 per cent) and Fortescue (108 per cent) — driven by a full year of stronger commodity prices and a focus on reducing costs.

Mr Hamson said it was difficult to give accurate long-term forecasts for commodities, but as long as iron ore prices remained where they were now, then 2018 should prove another year of higher payouts from the resources sector.

“I don’t think anyone can stand there and say resources will be great for the next 10 years, and that’s why we, being quite an active manager, can be underweight last year and overweight this year, we can move around quite quickly.

“I’m relatively bullish about it (iron ore). You could see for the next year or two prices staying where they are, in which case you would probably see further increases in dividends from the likes of BHP, Rio and Fortescue.”

Outside of the resources sector, there were gains in dividends from industrial companies, with IAG lifting its payout 54 per cent, Woolworths 52 per cent, AGL 39 per cent, Wesfarmers 26 per cent and JB Hi-Fi 26 per cent. Plato tracked 129 stocks within the S&P/ASX 200 making up 63 per cent of the index by value, and found two-thirds of stocks increased dividends, while 20 per cent cut payouts.

The average increase was 18 per cent, although the median change was a much smaller 5 per cent rise.

S&P/ASX 200 dividend changes in August

But the savage cut to Telstra’s future dividends did grab the headlines. Telstra warned that next year it would slash its full-year dividend to 22c a share — a 29 per cent cut — and expects to maintain dividends at that level.

“We believe the market has now pretty much priced all the bad news into Telstra, with the stock now trading on a forward dividend yield of approximately 6 per cent, or 8.6 per cent on a gross basis, using Telstra’s closing August share price of $3.67,” Mr Hamson said.

He said 15 years ago people were arguing Telstra was a growth stock, and now it has shifted to a yield play.

“You can change, the problem is you are not going to have the lofty valuations if you switch from one to the other.’’

In other disappointments, Mr Hamson cited telco Vocus after it announced a $1.5bn writedown, halting dividends and losing the interest of private equity players — all contributing to a 34 per cent share price fall in August.

Seven West Media wrote down $1bn in assets and cut dividends 50 per cent, with its share price falling 14 per cent.

“Two other disappointing results came from stocks that raised dividends. Domino’s, a growth stock rather than an income stock, raised dividends 16 per cent, but its earnings failed to match lofty expectations.

“BlueScope Steel also disappointed, not because of its good current results, rather it announced that this coming year’s earnings would be lower.”