Mining Slump Overthrows Decade of Investment Wisdom on Dividends

  • Anglo American suspends payout into 2016, changes policy rules
  • Progressive dividend policies under strain on commodity slump

Mining companies are eliminating one of the main reasons investors bought their shares for more than a decade; the promise of ever-increasing dividends.

The so-called progressive payouts made sense in a commodity bull market. Now they’re a millstone for managements struggling with collapsing prices for the metals and minerals that determine companies’ earnings and the cash they have to return to shareholders.

Anglo American Plc on Tuesday suspended payments through the end of 2016 and switched from ratcheting them up each year to distributing a percentage of its profits. For some investors, it shows the way forward for an industry where the two largest players, BHP Billiton Ltd. and Rio Tinto Group, remain committed to increasing dividends every year.

“In a cyclical industry it doesn’t really make sense to pretend that either your earnings or your dividends can progressively increase as far as the eye can see,” Euan Munro, chief executive officer of Aviva Investors, which manages about $370 billion of assets, said in an interview Tuesday with Bloomberg TV. “Certain industries are more cyclical than others. It’s been pretty obvious for some time that times are tough for the miners.”

Anglo American CEO Mark Cutifani said Tuesday the company sought to share the positive times with its holders and “pull our tights in” together when they’re a lot more difficult.

Top Four

In contrast, BHP and Rio Tinto are sticking with progressive dividends. BHP last month reaffirmed the policy it’s had in place since 2003. Yet both companies are vulnerable to a slump in iron ore, with the benchmark price for the steelmaking material falling below $40 a metric ton on Monday to a record low for data going back to May 2009. It’s down 80 percent since peaking in 2011 at $191.70. BHP and Rio spokesmen declined to comment.

Glencore Plc, the other of the top four U.K.-listed mining companies, was the first to curb dividends, canceling its full-year payment in September as part of a program to reduce debt and halt a rout in its shares. The company has had a progressive payment policy since before going public in 2011. A spokesman for Glencore declined to comment.

“The value in a progressive dividend is that the market believes it won’t get cut,” said Richard Knights, a mining analyst at Liberum Capital Ltd. “If all four of the big miners have to cut their dividends during this down cycle, it would be pretty clear proof that progressive dividends are meaningless.”

Investors’ skepticism over the status quo is demonstrated in soaring dividend yields for mine operators. The yields have jumped as companies maintained their policies on payouts even after mining shares collapsed and metals prices fell to six-year lows.

Solid A

BHP Billiton’s dividend yield is about 12 percent, the highest level since the company was formed through the merger of BHP and Billiton in 2001. The ratio has more than doubled since the start of 2014, while Rio’s yield has expanded to about 8 percent. In comparison, the average for the FTSE 100 index of major U.K. stocks is about 4.3 percent.

BHP says it seeks to increase payments while protecting its “solid A” credit rating. Both Standard & Poor’s and Fitch Ratings Ltd. rate BHP at A+, the fifth-highest grade, with negative views. Moody’s Investors Service maintains an A1 rating with a stable outlook.

“We forecast BHP Billiton’s financial risk profile will likely worsen in 2016, due to the continued weakness in commodity prices, combined with the company’s commitment to a progressive dividend payment,” S&P said in a statement on Nov. 24.

Cutting Risk

“Some companies have the ability to be able to continue to pay and I think that they should,” Evy Hambro, who manages Blackrock Inc.’s $3.5 billion World Mining Fund, said at a conference in London last week. “Other companies would be wise to cut those dividends. If possible, to not go to zero would be great.”

Cutting dividends comes with risks. Anglo American’s shares slumped by 17 percent on the day in 2009 that the company scrapped its payout for the first time since World War II. This time, CEO Cutifani met with investors to ensure there were no such surprises.

An industrywide shift toward making dividends proportional to income may help business longer-term by reducing companies’ vulnerability to wild swings in commodity markets.

“The market is already telling you it doesn’t believe the progressive payments are sustainable,” Liberum’s Knights said. “It’s definitely an industry that’s more suited to a payout ratio given its cyclical nature.”

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