Are miners ready to flank the banks when it comes to dividends?
Certainly BHP Boss Mike Henry has moved to stamp out any concerns over the big miner’s willingness to dish out dividends with a giant payout that could be a turning point for Australian market.
In a low rate environment where investors are still desperately seeking yield from share dividends, BHP has led the way for the wider resources sector with a $US1.01 ($1.30) interim dividend paid on a share price of about $47 a share.
Keep in mind that CBA’s “big” dividend last week was in fact just a pip more than analysts had expected and the payout ratio was 67 per cent.
In contrast the BHP interim payout is about 20 per cent higher than anyone expected and the payout ratio was 85 per cent.
And if brokers such as UBS have it right then these 4 per cent plus dividend yields could keep coming as BHP manages to pay for the operational investments it needs out of cash flow.
Moreover, these bumper dividends are fully franked, which is exactly what income seeking investors want.
BHP and the other leading miners lost support among retail investors when they abandoned the so-called progressive dividend policies in 2016: it was an admission that the mining industry is just too cyclical to promise steadily improving dividends year after year.
The thing is, commodity cycles can extend for years and if the market has it right then we are at the beginning of another period for bumper mining profits through which BHP and its peers can constantly pay out big dividends.
BHP’s latest results were buoyed by very strong iron and coal prices: many institutional investors, such as US investment bank JPMorgan, believe this recent lift in prices is the beginning, not the end, of a new commodity cycle fuelled by low rates and the “unintended consequences of the fight against climate change”.
“We believe that the new commodity upswing, and in particular the ‘oil up cycle’, has started,” said the bank in a major strategic report issued last week.
Put it this way: the last super cycle went for about a decade, finishing around 2008 when mining profits became so high-profile they later triggered the Labour government’s ill-fated super profits tax.
If we are at the beginning of another decade of big profits from the miners — and this time around the dividends are exceptionally attractive — investors cannot look away.
The ability of big miners to pay up high yields during periods of low rates also highlights the issue when a growth stock such as CSL stops “growing”. It leaves little in the way of consolation: CSL vies with BHP and CBA as our most important stock, yet it only has a dividend yield of near 1 per cent. CSL has actually gone nowhere in the last 12 months and it is now at $286, against $320 this time last year.
In the days ahead BHP’s peers will also report results and offer their take on the dividend dilemma. Expect big numbers from both Rio Tinto and Fortescue.
For seasoned investors, it is a tempting time — miners cannot be classified as growth stocks but if the commodity super cycle really is beginning again, what’s the difference?
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