Originally Published in AFR – Jessica Sier (13/12/16)
This year’s stunning resurgence in commodity prices has Australian resource companies well placed to at least double their shareholder payouts.
“The rhetoric at the moment is still that there will be greater ﬁnancial discipline going forward,” said Romano Sala Tenna, portfolio manager at Katana Asset Management. “And as such we expect a greater return to shareholders via dividends, probably around double for the majors.”
Earlier in the year, resource giants BHP Billiton and Rio Tinto switched from progressive dividend plans, in which they had promised not to decrease their payments to shareholders at any six-month interval regardless of their earnings results, to a hard and fast payout ratio, where dividends were relative to a company’s total net income.
BHP’s most recent ﬁnal dividend was 18.5¢ a share and Rio Tinto’s interim was 59.1¢ a share.”Those big resource players are likely to up their payouts, that’s my gut feeling,” said Karl Siegling, portfolio manager at Cadence Capital. “I would have thought iron ore producers like Fortescue, who have just had a record period, might be able to put out more dividends as well. “But I would have thought for the other base metal guys, it’s just too early.”
Ratings agency Standard & Poors recently said it believed the big end of town would be able to increase dividends within two or three years. In a review of the big miners after the recent reporting season, S&P praised efforts across the sector to reduce costs and pay down debt. “According to our calculations, the big companies are likely to reach their leverage targets by the end of 2017 or 2018, after which they are likely to distribute more dividends to shareholders, though we anticipate that they will retain more payout ﬂexibility than they had in the past,” it said in a note.
South32 paid out only a US1¢ a share unfranked ﬁnal dividend, which reﬂected the company’s policy of distributing a minimum 40 per cent of underlying earnings to shareholders every six months.
The company could have paid more, given it had an extremely strong net cash position of $US312 million ($416 million), but the company was eying two acquisitions and as such opted to spend about $US50 million on dividends.
Fortescue Metals, where Andrew Forrest is the dominant shareholder, last paid out 12¢ a share, but given iron ore’s meteoric price rise this year, might have room to pay out more.
“I’d expect Fortescue to at least double their payout as well,” Mr Sala Tenna said. “Our modelling shows around 30¢ to 35¢.”
While gold had come off the boil slightly since Donald Trump’s surprise US election win sparked a risk-on rally in commodities and equities, it had still performed very well in the year to date. In August, four of Australia’s largest gold producers collectively increased dividend payments to shareholders by 150 per cent in the 2016 ﬁnancial year, and some expected that to run further. “While it’s come off a bit, on their contracted books gold producers will be making pretty good proﬁts,” Mr Siegling said. “So I would have thought yes, they’ll up theirs a bit.” Newcrest Mining last paid out a 9.8¢ dividend and Evolution Mining recently doubled its ﬁnal dividend for the 2016 ﬁnancial year.
Shareholders in Evolution collected a 2¢ a share unfranked ﬁnal dividend, double the 1¢ ﬁnal dividend paid in the 2015 ﬁnancial year, after the miner agreed in June to double its dividend rate to 4 per cent of sales revenue, effective from the second half of the 2016 ﬁnancial year.
Regis Resources paid out a well-ﬂagged 9¢ a share ﬁnal dividend, which took its total dividend for the year to 13¢ per share, a 117 per cent increase on 2015.