BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) are hardly the first stocks that come to mind when you mention dividend investing — or they’re not any more.
Indeed, these two miners used to be to FTSE 100 dividend champions. The commodities boom between 2000 and 2014 produced a huge tailwind for these businesses to grow and managements introduced progressive dividend policies to reward investors so dividend payouts grew steadily over the years.
However, after the commodities price crash in 2014, these two miners struggled to sustain the payouts, which had become unwieldy compared to cash flows thanks to the progressive payout policies. As a result, both BHP and Rio had to slash dividend payouts to preserve cash and help pay down debt.
Significant changes
Several years on and a lot has changed for these two companies. Management has cut costs to the bone, improving margins and helping cash generation. Additional cash flow has enabled these businesses to pay down debt, and a reduction in capital spending has further improved their financial profile.
All of these changes are great news for dividend investors. BHP and Rio have shifted from volume producers to value producers, and now cash is king for these companies, dividend payouts are likely to be more secure than they have been previously.
For example, at the end of 2016, BHP reported net operating cash for the six months ended 31 December 2016 of $7.7bn, up 46% year-on-year. At the same time, capital and exploration expenditure fell 38% to $2.7bn, and net debt declined by a quarter from $26bn to $20bn. With cash flowing, debt levels falling and little demand for capital spending, BHP’s management increased the company’s dividend payout per share for the period by 150% to $0.40c. Meanwhile, for the period ending 31 December 2016, Rio generated $8.5bn in cash from operations, reduced debt from $13.8bn to $9.6bn and returned $3.6bn in cash to investors during the period.
Further growth ahead
These figures are only a snapshot of the companies’ financials, but they show clearly how Rio and BHP have transformed themselves into cash cows. Shareholders should continue to benefit as these firms pay down debt, grow through selective acquisitions and development, and return any excess cash to investors.
City analysts expect Rio to pay out 213p per share to investors via dividends this year, equal to a dividend yield of 6.5% at current prices. The shares trade at a forward P/E of 8.8 based on the fact that earnings per share are expected to expand 66% this year. Meanwhile, BHP’s dividend yield for the year ending 30 June 2017 is projected to grow to 66.8p per share for a dividend yield of 5.4%. Analysts have pencilled-in earnings per share growth of 534% for a P/E of 10.4.
With such impressive dividend yields already on offer and further growth likely on the horizon, it’s hard to turn down these two dividend champions.
