Investors chronicle dividend of the week 22/07/2013

This week we are going to narrow our horizons and have a look at a single sector. We are going to examine the mining sector globally. Obviously this is a controversial choice as a lot of investors have had their fingers badly burned in this sector. However, by the very nature of this column, we are only interested in those companies that can afford to pay a dividend and so we expect to avoid the horror stories that have occurred in the mining minnows.

Mining stocks are currently bombed out with commodity prices under pressure and this is the time for the contrarian investor to take a stance. A lot of people are fretting about China’s growth slowing, but surely this is inevitable. The Government is now focussing on higher-end productivity and wants to move away from the ‘made in China’ image. They are looking to increase the overall standard of living with better healthcare, education, etc. Even so, the economy still continues to grow at very high rates. If we believe all of the news coming out of America, then that means the two largest economies in the world are growing. It might not be full steam ahead, but the US is certainly moving through the gears and China is in cruise control.

Also, it does look as though the sector may have bottomed out and if that is the case, the upside could be very considerable. The initial criterion is to select the mining sector globally and this gives us a list of 18 stocks that are covered by DividendMax.

Our next selection criterion is for a yield of over 2%. This eliminates Randgold Resources and Lonmin.

With miners at the moment we believe that size really is important (many of the tiddlers have been wiped out over the past few years) so we eliminate anything with a market cap below £1 billion. This eliminates African Barrick gold, Petropavlovsk, New world resources, Hochschild and Nyrstar and we are very quickly down to eleven stocks, listed below:

Eurasian Natural Resource Corporation, Freeport-McMoRan Copper and Gold Inc, Anglo American, Fresnillo, BHP Billiton, Glencore Xstrata, Vedanta resources, Polymetal International, Rio Tinto, Kazakhmys and Antofagasta.

We have seen recently how exposure to a single commodity can damage the shares of mining stocks very adversely; witness Petropavlovsk and African Barrick Gold, so we are going to focus on broad based miners. This eliminates gold and silver producers, Polymetal International and Fresnillo, Copper focussed Kazakhmys and Antofagasta. Eurasian Natural Resource Corporation is subject to a takeover proposal so we will also eliminate them.

This leaves Freeport-McMoRan Copper and Gold Inc, Anglo American, BHP Billiton, Glencore Xstrata, Vedanta resources and Rio Tinto. There are some big companies in this list with five of them in the FTSE 100.

At this point we can look at the fundamentals:

It cannot be argued that any of these stocks are expensive so we are going to have to eliminate on the pure numbers. Vedanta and Freeport are eliminated on yield grounds (neither are helped by the fact they have both recently gone ex-dividend) Glencore Xstrata have just completed a mega merger and whilst there should be much in the way of cost saving and synergies, it took a long time to complete and is something we should be looking at in twelve months’ time; when the success or otherwise of the merger can be evaluated.

Anglo American are a company we used to like, but from a dividend perspective, they disastrously completely cut their dividend in 2009. We saw dividend reductions from many of their competitors, but very few scrapped the dividend. They report their 2013 interim results on the 26^th July. The shares have been battered over the past two years and do look reasonable value at the moment.

BHP Billiton are very robust. Whilst most of the other miners excluding Vedanta (who were unlucky not to make the cut having just gone ex-div) have had to cut or reduce their dividends in the great recession, BHP continued to increase their dividend. Their 2013 numbers are released on 20^th August, so in reality we should be looking at the 2014 number for the P/E which brings it down to 10.6x. Their 2013 production report was released last week and it looked promising for the final results.

Rio Tinto really do look good value on 8.3x earnings. On the 8^th August, they announce their half yearly results for 2013. They go ex-dividend on 14^th August.

Let’s have a look at the dividends paid by each company over the past 6 years:

Anglo American

BHP Billiton

Rio Tinto

So, after six years, Anglo American are paying 60% of what they were paying in 2006. Rio Tinto have nearly doubled their dividend in the same timeframe. BHP Billiton have increased their dividend by 356%.

At this point we are going to throw in a curved ball and say, why try and figure it out? Let somebody else do the head-scratching for you. Blackrock World mining trusts top ten investments are:

Rio Tinto 11.1%, BHP Billiton 10.9%, Glencore Xstrata 10.3%, London Mining 6.6%, First Quantum minerals 4.9%, Freeport-McMoRan 4.5%, Industrias Penoles 3.3%, Inmet Mining 3.2%, Iluka resources 3.1% and Fresnillo 3.0%.

Their net asset value is 503.65p (including current year income) and they are priced at 455p, trading at a discount of almost 10%. It is a pretty good way to get a broad spread of world mining stocks.

It is interesting to see that the DividendMax analysis agrees with the fund manager and our top two choices are their two largest investments.

It is a very close call between Rio Tinto and BHP Billiton, but for its consistent track record through the great recession, the larger increases in the dividends and the recent very solid production report, the dividend of the week is BHP Billiton.

We are estimating the next three dividends to be 38.5p, 38.2p and 42.0p They are at 1863p at Fridays close. At 1863p, this will generate a return of 5.68% annualised over a 14 month period.

BHP Billiton yield calculation:                                                                             

38.5 + 38.2 + 42.0 = 118.7p between now and 3/9/2014 (approximate ex-dividend date of the third dividend)

Ergo    118.7p / 1863 = 6.37%           6.37% annualised = (6.37x365) / 409* = 5.68%

*Number of days until theoretical ex-dividend of the third dividend.

Note that if the dividend forecasts are correct, the actual yield (which DividendMax calls the ‘Optimized yield) is affected by two factors; the share price and the proximity to ex-dividend dates. DividendMax performs these calculations daily against hundreds of stocks in the U.K. and overseas producing new lists every day as prices change, dividends change and ex-dividend dates approach.