Mining Sector Ideas

[gfp927z]

BHP Billiton -- >>> Here's A Novel Investment Idea: Resource Stocks As Yield Plays



Forbes

May 2, 2013


http://www.forbes.com/sites/timtreadgold/2013/05/02/heres-a-novel-investment-idea-resource-stocks-as-yield-plays/?partner=yahootix



The jury of investment analysts is out but there is growing interest in some of the world’s biggest mining companies as emerging yield plays rather than fading growth stocks thanks to a decision by an Australian oil and gas producer to shower cash on its shareholders.

Woodside Petroleum , one of the world’s biggest independent producers of liquefied natural gas (LNG), surprised the market last week with a bonus dividend and, more importantly, a decision to return 80% of future profits to shareholders.

That boost from a previous payout ratio of around 50% of profits, plus the one-off special dividend of 61c a share, was responsible for an immediate 10% increase in Woodside’s share price which rose on the Australian stock exchange from AU$33 before the increased payout to trade over AU$37.

Some observers were quick to say that Woodside was a special case with surplus cash thanks to the start-up of a new LNG project, the sale of an equity interest in another LNG project, and a decision to shelve an expensive development that would have required a major capital commitment without being underpinned by a convincing business case.

Perhaps Not A Special Case

Other followers of the resource sector are not so sure that Woodside is so special and that its decision to drop growth options in favour of fatter returns for investors could be the start of a new phase in the resources boom, a time when the cash flows to shareholders rather than the project development dreams of management.

The key man in the push to return cash is one of Australia’s leading company directors, Michael Chaney, a man who currently chairs Woodside but who, for 10 years, was a director of BHP Billiton and who also served as chief executive of the shareholder focused Wesfarmers group which operated on performance guidelines built around return on shareholder’s equity.

If, as seems likely, Chaney is blazing a new trail for resource companies which have traditionally been miserly in rewarding investors, then the scene might have been set for a recalculation of resource company share prices over the next 12-to-24 months.

The reason it will take that long for Chaney’s embryonic revolution to reach the big diversified resource companies such as Rio Tinto , Anglo American and his old firm, BHP Billiton, is that the big boys of mining have pre-committed most of their funds to major capital works.

BHP Billiton, for example, is spending $20 billion this year on new mines, but from next year thanks to a high rate of project cancellations, the capital commitment declines with a surplus expected to start accruing from 2015.

Investors Putting New CEOs Under Pressure

The other interesting feature of the big miners is that all are effectively under new management with Andrew Mackenzie replacing Marius Kloppers at BHP Billiton. Sam Walsh replacing Tom Albanese at Rio Tinto and Mark Cutifani replacing Cynthia Carroll at Anglo American.

Andrew Mackenzie (R) speaks as it is announced he will be replacing Marius Kloppers (L) as BHP Billiton CEO while company chairman Jac Nasser (C) listens, in Sydney on February 20, 2013. The 56-year-old Mackenzie, currently chief executive non-ferrous, has over 30 years experience in oil and gas, petrochemicals and minerals and joined BHP Billiton in November 2008. (Image credit: AFP/Getty Images via @daylife)

Investors, hungry for yield in a world of low interest rates, will be making it clear to the new boys that they want what Woodside’s shareholders are getting; cash back.

Early-bird estimates of what a more generous dividend policy would do to resource companies can be seen in the reaction of Woodside’s share price and the fact that the company is currently generating a dividend yield of 5.6%, rising to 7% next year.

BHP Billiton, which is on a yield of 3.4% thanks to its 45% dividend payout ratio, would rise close to a 5% yield if it boosted its dividend ratio to 60%. Rio Tinto, at a 60% ratio, would yield a notional 7%.

It would be unwise to buy any of the big resource stocks yet on the basis of a more generous dividend policy, but the seed has been sown by what’s happened at Woodside under the guidance of a former BHP Billiton director.

<<<