Last week was something of a shock for those investors who have come to rely on the dividend flow from the big miners. The mining heavyweights have been a lucrative source of fully franked dividends for quite a few years now, but the fact is that resources producers’ revenue and profitability – and thus, their dividends to shareholders – are subject to world economic growth, commodity prices and exchange rates, none of which they can control.
But last week, mining heavyweight BHP slashed its interim dividend to an eight-year low of 50 US cents a share, down from 72 cents a year ago, as ongoing weakness in the iron ore market, attributed to weaker Chinese demand, affected its half-yearly earnings. BHP reported a 23 per cent fall in its first-half attributable underlying profit, to $US5.08 billion ($8 billion) for the six months ended December 2024, as lower prices for iron ore and steelmaking coal hit the bottom line.
Iron ore earnings – the company’s biggest earner – were down 26% in the first half compared to the same time last year, due to lower global prices, as the average realised price fell almost 22%, to US$81.11 per wet metric tonne from US$103.0 a year ago. The lower contribution from iron ore was partially offset by a 44% increase in earnings from copper, which rose to US$5 billion.
Later in the week, Rio Tinto told shareholders it will pay its lowest dividend in seven years and cut costs at its Australian iron ore division after full-year underlying profit fell by 8% to a weaker-than-expected US$10.86 billion in 2024 (Rio uses the calendar year as its financial year), a five-year low. Rio shareholders will receive a US$2.25 ($3.55) a share final dividend on April 17, after the miner posted a weaker-than-expected US$10.86 billion underlying profit for 2024.
The final dividend brought the full-year dividend to US$4.02, the lowest return for Rio shareholders since 2017. Despite this, the dividend did come in at the top of the range of Rio Tinto’s stated dividend policy, which is for a payout of between 40%–60% of underlying earnings.
Then it was the turn of iron ore specialist Fortescue, the world’s fourth-largest iron ore miner, which disappointed investors with both its interim profit and half-year dividend. For the half-year ending December, revenue was down almost 20%, to US$7.6 billion; underlying earnings fell 38%, to US$3.6 billion; net profit more than halved, to US$1.6 billion
Fortescue made 21% less on average for each tonne it sold in the six-month period, while costs to produce that ore rose by 8% – that is never a great situation for a miner to be in. And free cash flow was down by a stunning 75%: that is net cash flow from operating activities, minus the capital spending the company does, and paying its bills.
All that flowed through to an interim dividend of 50 cents a share, less than half of what Fortescue shareholders received for the December half-year last year ($1.08). The dividend represented a payout ratio of 65% of its profit, meeting the company’s 50%–80% target range. Fortescue shares sagged 7% on the announcement.
It all added up to a reminder, yet again, to any investors that needed it, that no dividend can be considered guaranteed: it is up to the company’s discretion, and if it decides that the money earmarked for the dividend needs to be used elsewhere – or isn’t there – the dividend can be cut or even scrapped altogether.
These days, many investors have access to the dividend forecasts of the analysts at stockbroking firms and investment banks, and they like to use the estimated (or “prospective,” or “expected” or “forward”) dividends for upcoming years, to work out what their “expected” yield is, on the current price. (In reality, every investor has their own personal dividend yield figure, based on the average purchase price of all the shares they own in a particular company, calculated from its current share price.)
But, with the impact of franking, the grossed-up yields of the big miners have been considered by many investors as a reliable yield investment, and one that has paid a much more attractive “rate” than many other investments they could use for income.
Investors doing this – and it is a very popular way of investing in Australia – often overlook (or even ignore) the fact that they are incurring capital risk: that is, at any time, the shares they are using for yield could slump in price, and the fall in value of their holding could offset the dividend income they are receiving.
Also, when it comes to BHP, Rio Tinto and Fortescue, which all report their results in US dollars, investors have to factor in the effect of fluctuations in the A$/US$ exchange rate, which can boost the dividend in Australian dollar terms, or erode it, in various circumstances.
Over the next couple of weeks, analysts will be updating their earnings and dividend expectations for the companies, and the yield expectations, based on current share prices, will likely change.
As it stands, however, the big miners still boast attractive expected dividend yields – but it is getting harder to find value.
The current situation is that while Rio Tinto and Fortescue are stronger in terms of their dividend yield, the perceived share price value is quite poor. While BHP doesn’t exactly shoot the lights out in terms of projected value – understandable, given the heightened risk that pervades the commodities market – it looks the best buying proposition of the Australian big three; with a touch more capital-gain prospect.
Here is how analysts see the trio, for now.
- BHP (BHP, $41.26)
Market capitalisation: $209.3 billion
12-month total return: –2.2%
Three-year total return: 6.2% a year
Estimated FY25 (June) dividend yield: 4.2% fully franked (grossed-up, 6%)
Estimated FY25 (June) price/earnings (P/E) ratio: 12.7 times earnings
Analysts’ consensus target price: $45.19 (Stock Doctor/Refinitiv, 17 analysts); $44.93 (FN Arena, six analysts)
- Rio Tinto (RIO, $123.49)
Market capitalisation: $200.5 billion
12-month total return: 3.8%
Three-year total return: 8% a year
Estimated FY25 (December) dividend yield: 5.4% fully franked (grossed-up, 7.8%)
Estimated FY25 (December) price/earnings (P/E) ratio: 11.1 times earnings
Analysts’ consensus target price: $128.73 (Stock Doctor/Refinitiv, 13 analysts); $126.75 (FN Arena, six analysts)
- Fortescue (FMG, $18.65)
Market capitalisation: $57.3 billion
12-month total return: –24.8%
Three-year total return: 8.5% a year
Estimated FY25 (June) dividend yield: 6.1% fully franked (grossed-up, 8.7%)
Estimated FY25 (June) price/earnings (P/E) ratio: 10.9 times earnings
Analysts’ consensus target price: $18.35 (Stock Doctor/Refinitiv, 16 analysts); $18.48 (FN Arena, seven analysts)
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
