Mining company Glencore has announced plans to resume paying dividends to shareholders with an expected $1 billion payout in 2017. And according to Chris Beauchamp from online trading platform IG Group, the firm will not be the last. He predicts miners’ dividends are poised to return in 2017, supported by an ongoing rally in commodities prices.
The commodities sector has suffered over the past five years. Major miners scrapped their dividends one after another because of concerns about their profits and cash flows. However, a rally in commodities prices since February could lead to a dividend comeback among mining companies.
“I do not think the rally of the past eight months has come to an end just yet. Miners remain a good opportunity for 2017,” Beauchamp, said in a press roundtable in London this week.
“Miners seem to have got through the worst of it. Glencore (GLEN) has talked dividends, and Goldman Sachs upgraded their commodities outlook last week as well.
“Companies like BHP Billiton (BLT) and Rio Tinto (RIO) are also cheap by historical standard and there is nothing wrong buying things that are cheap,” said Beauchamp.
Beauchamp believes the outlook for commodities demands in the US and China remain robust. Mining companies have their balance sheets improved and Beauchamp agreed that miners’ dividends look sustainable coming forward.
Mathew Hodge, senior equity analyst for Morningstar echoes Beauchamp’s views, saying that the market is now upbeat at the prospect of a Donald Trump presidency, particularly for commodities and commodity producers.
“The most important Trump policy for commodity producers is the promise to invest $1 trillion on infrastructure in the next 10 years,” said Hodge.
Adding that US-based steelmakers are likely to benefit as Trump says he wants steel to be the backbone of American infrastructure.
“China, with roughly half of global demand for key commodities such as steel, aluminium and copper, is still the driving force for demand,” Hodge added.
Outlook for Gold Less Promising
IG’s Beauchamp forecast the precious metals’ outlook for 2017 to be less promising; he expects gold prices to be drop below $1,000 per ounce by the end of the year. He suggests investor buy base metal over the precious metal for the time being.
Companies like Rio Tinto and Glencore mine a broad variety of minerals worldwide, and they have attractive dividend yields, Beauchamp said.
Rio Tinto scrapping its progressive dividend policy in 2016 was a step in the right direction, said Hodge. It improved the company's flexibility to allocate free cash flow and maintain a strong balance sheet.
Rio Tinto is one of the direct beneficiaries of China's increasing appetite for natural resources. Hodge added that the company’s cash flow base is somewhat diversified, and is less susceptible to the vagaries of the market than single-commodity producers. Rio Tinto is up 54.9% year to date and it is rated two-star by Morningstar analysts, meaning that analysts believe the stock is trading above its shares fair estimate values.
Meanwhile, Glencore ranks among the most diversified of the global megaminers. As China is the key demand driver for nearly everything Glencore digs out of the ground, diversification benefits are limited, said David Wang, equity analyst with Morningstar. Glencore is up 210% year to date and it is rated one-star by Morningstar analysts, also meaning that analysts believe the stock is trading above its shares fair estimate values.
The UK-based miner Anglo American (AAL) has taken steps to improve its financial position by slashing capital expenditures and suspending the dividend, profitability at many of its mines will remain challenged, said Wang. The company's planned asset sales should help shore up its balance sheet, Wang added. The stock is up 96.7% year to date and it is rated one-star by Morningstar analysts.
UK dividends were down 2.9% in the third quarter of 2016, owning to deep cuts at large mining companies listed in the UK, such as Glencore, according to the latest Henderson Global Dividend Index report.
However, the report also suggested that the level of UK dividend payments will boost thanks to the sterling weakness, given the fact that 40% of UK dividends are paid in US dollars.
Oil Producers Up on OPEC Deals
The Organization of Petroleum Exporting Countries reached a deal to cut oil production in its meeting yesterday. The oil price rose 8% on Wednesday to $50.84 per barrel at the London stock market close. Brent crude oil trades above $52 per barrel in today’s early trading.
OPEC has agreed to reduce its oil output by 1.2 million barrels per day from January 2017, the first deal that has been signed to limit supply in eight years.
OPEC said the cut will "be subject to" non-OPEC countries cutting production by 600,000 barrels per day, including a 300,000 barrel per day cut from Russia. Previously, Russia was only agreeing to freeze production levels.
Oil producers BP (BP.) and Royal Dutch Shell (RDSB) rose 3.8% and 4.3% to the end of Wednesday, leading the FTSE 100. IG’s Beauchamp said it looks like these oil firms will be at the forefront of further bullishness, and a stabilisation in oil prices will help keep fears about a dividend cut on the back burner.
Dominic Rossi, global chief investment officer equities for Fidelity International warned investors should not chase this oil price rally too hard.
“I would not get too excited by the OPEC cut. Compliance will be a problem, and the Russians will pump more gas instead. In the meantime, the long-run marginal cost of US shale continues to fall,” said Rossi.
