LONDON -- Mining isn't a sector that's popular with income-seekers. Miners have been more interested in spending on new projects than in returning cash to shareholders. But mining investors are set to get a double boost to payouts that could change perceptions of the sector.
First, there's a new sense of conservatism in the industry, with a new generation of bosses conscious that they need to do more to keep investors sweet. Cash flow is being diverted from prestige projects into dividends.
Secondly, the weakness of sterling should prove a fillip for U.K. investors who get their dividends in pounds. The sector's income is mostly dollar-denominated, and the three big miners -- Rio Tinto (RIO 2.63%) (RIO 3.11%), BHP (BLT +0.00%) (BBL +0.00%) and Anglo American (AAL 4.43%) -- all base their dividends in dollars.
After 2012's dividend-fest, this year the rate of growth of payouts in the FTSE is expected to soften. So it's worth income investors taking a look at this sector.
Cycle
Industrywide factors are affecting all the commodity miners. Demand for commodities is softening, mirroring the Chinese economy which is the industry's biggest driver. But it's been a soft landing, much less drastic than some feared, giving the sector time to adjust.
Nevertheless, weakened prices have hit profitability. Recent results show drops in underlying profit from Rio, BHP and Anglo of 40%, 43% and 44%, respectively.
The similarities between the three big miners don't stop there. All have written off big chunks of their balance sheets, as ambitious megaprojects committed to at the height of the commodities boom look too expensive or uneconomic. On aggregate they've written off $22 billion this year. That's gone hand in hand with delaying or slowing major development projects.
Cash from austerity
Those measures have reduced capital expenditure commitments. At the same time, the miners are cutting back on exploration expenditure. That frees up cash to return to investors. In the long term, it will reduce supply and lead to hardening prices, which will stimulate more growth. But at this point in the economic cycle, investors can enjoy the increased free cash flow.
Tightened prices also put pressure on the miners to pare operating costs, and they all have programs to slash expenses.
This new-found appetite for austerity has ushered in a new generation of managers. Rio, BHP and Anglo have all recently changed their CEOs, in each case replacing a deal-maker with a more operationally experienced, hands-on mine manager.
Dividends
|
|
Historic Yield |
Projected Yield |
|---|---|---|
|
Rio |
3.0% |
3.2% |
|
BHP |
3.3% |
3.6% |
|
Anglo |
1.0% |
2.8% |
You can see from the table that the miners aren't over-generous when it comes to dividends, despite having decent dividend cover. But they're all expected to increase the payout and indeed they have all committed to a progressive dividend policy, denominated in U.S. dollars.
That's a crucial point. Sterling has dropped further since these consensus dividend projections were put together. The more the pound falls, the more dollar-based dividends are worth to U.K. investors.
Brokers Shore Capital think that dividend growth in the FTSE 350 could double if sterling continues to fall against the dollar, with most of the benefit concentrated in the FTSE's 10 biggest companies, which includes the miners.
Just earlier this month, Capita Registrars had predicted that the rate of dividend growth in the FTSE 350 would continue to slow. It forecast that total dividends in 2013 won't be any larger than last year, which benefited from several special one-off payments. So a foreign currency bonus could provide a valuable boost to income-seekers this year.
Reliability
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