At the height of the commodities downturn, almost every mining company made big cuts to their dividend payouts. But that’s old news now that commodity prices are rising again. Although the price of most commodities remain well below their previous peaks, industry profits have recovered strongly and debt levels have moderated. As such, shareholders in the mining sector face growing shareholder payouts this year.
Dividend increases
Three big miners — BHP Billiton (LSE: BLT), Rio Tinto (LSE: RIO) and Anglo American (LSE: AAL) — this month stated an intention to return more cash to investors this year. BHP is providing the most generous increase, with the miner promising to more than double its interim dividends per share to $0.40, from $0.16 last year.
Rio increased its final dividend to $1.25 per share, from $1.075 last year, but total dividends for 2016 still fell 21% on last year. However, Rio did surprise investors with a share buyback of $500 million, which would likely be accretive to earnings. Meanwhile, Anglo American, which had been harder hit by the downturn, aims to reinstate dividends by the end of 2017.
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Rio has a higher yield
| Dividend yield (TTM) | Forward dividend yield (2017e) | Dividend cover (2017e) | |
| BHP Billiton | 1.8% | 3.9% | 1.9x |
| Rio Tinto | 4.0% | 5.1% | 1.8x |
Despite BHP’s big dividend increase, BHP’s forward dividend yield is expected to fall short of Rio’s yield. That’s because BHP made a 75% cut to its interim dividends this time last year, and is therefore increasing its dividend from a very low level. It’s also important to note that BHP’s proposed interim dividend of $0.40 per share still falls short of the $0.62 figure it paid back in 2015.
That said, BHP does appear to benefit from a modestly higher level of dividend cover than Rio, which may indicate greater dividend sustainability. I would disagree, though, as I think Rio may be a safer dividend stock than BHP.
Rio has less debt
A key pillar of strength at Rio is its balance sheet, evidenced by its low net debt to EBITDA ratio of 0.71x. Contrast that with BHP or Anglo American, which have net debt to EBITDA ratios of 1.22x and 1.40x, respectively, Rio benefits from significantly less leverage. Rio’s lower reliance on debt should mean it will have more financial flexibility to weather a potential downturn and benefit from lower costs of financing. Already, Rio’s dividend history shows its dividend payouts have been less volatile than its peers.
BHP’s margins are improving
BHP does have one big advantage, though — its profits are rebounding more strongly. Its underlying EBITDA margin during the six months to 31 December rose to 54%, up from 40% in the same period last year. This compares favourably to Rio’s 2016 full year EBITDA margin of 38%, and it’s primarily down to BHP’s greater exposure to historically less profitable commodities, namely coal and copper.
Bottom Line
Despite BHP’s rapidly improving profitability, I believe Rio Tinto is the better dividend stock. Its EBITDA margins may smaller than BHP’s, but it is still relatively very high compared to sector peers. Moreover, Rio appears to have a stronger balance sheet and a better dividend track record.
