Is It Time To Sell Vedanta Resources plc And Buy BHP Billiton plc?

It could be time to sell Vedanta Resources plc (LON: VED) and buy BHP Billiton plc (LON: BLT).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Global diversified mining giant, Vedanta Resources (LSE: VED) is falling today after the company issued a mixed production update.mincon.1

The India-focused miner reported that during the first half of the year, the company’s gross oil production declined by 3%, while refined zine output was also lower than the corresponding period due to unplanned maintenance activities and lower grades of ore mined. On the other hand, Vedanta reported a higher level of copper and power output for the period. 

Unfortunately, this mixed update has not been enough to convince investors that Vedanta is worth its lofty valuation. Even after today’s declines, the company is trading at a forward P/E of 21.8, a valuation more suited to a high-growth tech company rather than a miner. What’s more, both BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) are more attractive based on current valuations. 

Time to buy

As iron ore miners, Rio and BHP have both seen their share prices fall in line with the price of iron ore over the past month or so. However, these declines have presented the perfect opportunity to buy, as the two mining behemoths have spent a long time planning for this iron ore market weakness. 

Actually, it’s widely assumed that both BHP and Rio have created this market weakness as they ramp up their production of iron ore. The iron ore market is already over supplied and additional supply is only depressing prices further. Nevertheless, with BHP’s and Rio’s average cash cost of production per ton of iron ore in the low $30’s, the two miners will be able to weather price declines.

Additionally, like Vedanta, BHP produces other assets aside from iron ore. BHP has built itself around a ‘four pillars’ strategy, producing four key commodities — iron ore, copper, petroleum and coking coal — which means that the company is not overly exposed to the falling iron ore price.

Low valuation 

Unlike Vedanta, both BHP and Rio now trade at low, attractive valuations after recent declines. For example, BHP currently trades at a forward P/E of 11.8 and Rio trades at a forward P/E of 9.6.

That being said, as Rio is predominantly an iron ore producer, the company is likely to see its earnings fall significantly this year. Indeed, City analysts have estimated that a $1 drop in the average iron ore price, wipes out $135m of annual net profit after tax at BHP Billiton and $122m at Rio. 

Still, despite falling profits, the two mining giants support attractive dividend yields that are well covered by earnings per share. Specifically, Rio currently supports a dividend yield of 4.4% and the payout is covered three times by earnings per share. BHP supports a dividend yield of 4.6% and the payout is covered twice by earnings per share.

In comparison, Vedanta does support a dividend yield of 4.1% at present levels but last year the payout wasn’t covered by earnings. The City’s current figures suggest that Vedanta’s dividend payout will be covered just once by earnings per share this year, which does not leave much room for growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »