Dividends worry mining sector income investors

The lowest payout ratio since BHP Group Ltd (LSE:BHP) changed its dividend policy in 2016 today fuelled caution ahead of results by mining heavyweights Rio Tinto Registered Shares (LSE:RIO), Glencore (LSE:GLEN) and Anglo American (LSE:AAL).

Australia’s BHP, which is no longer in the FTSE 100 index after switching to a standard London listing in 2022, announced a half-year dividend equivalent to 56% of underlying earnings.

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The payout of 72 US cents a share is worth $3.6 billion (£2.9 billion) and will be paid on 28 March. The distribution exceeds BHP’s commitment for a minimum 50% of earnings each half year, but is down sharply on the average of 75% for the period between 2018 and 2022.

BHP’s interim results and the full-year figures of Rio Tinto and Glencore tomorrow and Anglo American on Thursday will be in sharp contrast to 2022’s dividend distributions, when miners accounted for £1 in every £6 declared by UK-listed companies.

The fall back in iron ore and copper prices resulted in BHP’s ratio coming in at 64% in the 2023 financial year, when the total award was $1.70 a share.

BHP’s policy came into force in 2016, when the company formerly known as BHP Billiton announced the first cut in its dividend in over 30 years.

Rio Tinto, which targets returns to shareholders in a range of 40% to 60% through the cycle, paid 50% of earnings in July’s half-year results after a 34% cut to 177 US cents a share.

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Glencore was the only major blue-chip miner to increase shareholder distributions in last summer’s results season, when the resilience of its commodities marketing arm led to a top-up distribution of $1 billion (£800 million) or eight cents per share.

That made Glencore the world’s 10th-largest dividend payer in the third quarter and the biggest by a FTSE 100 company. However, shares have fallen this year as near-term earnings headwinds and the proposed acquisition of the steelmaking arm of Canada’s Teck Resources (TSE:TECK.A), have led to expectations that returns in 2024 may be limited to just the base dividend.

Anglo American, whose interests include copper, platinum group metals, De Beers diamonds and the Woodsmith polyhalite fertiliser mine project in North Yorkshire, has been the laggard of the sector due to high capital expenditure and weakening prices.

It heaped further disappointment on investors in December when it forecast lower output over the next two years, although it said it continued to expect the dividend payout for 2023 results to be in line with its established policy at 40%.

Copper miner Antofagasta (LSE:ANTO) has a minimum payout policy of 35% of earnings, which it bettered today when it proposed a final dividend of 24.3 US cents for payment on 10 May.

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The total for the year is down 39.7% to 36p a share but chief executive Iván Arriagada said an overall pay-out equivalent to 50% of 2023’s earnings reflected confidence in future prospects.

UBS said the company’s significant capital expenditure pipeline may limit future dividend upside for a company whose yield is modest at below 3%.

However, the Swiss bank has a “buy” recommendation as it notes the upside risk to prices based on the prospect of limited supply growth this year and protracted deficits from 2025. It added: “We have not been perennial copper bulls, but believe the market is close to an inflection point.”

The direction for commodities in 2024 and beyond will depend on factors such as China’s economic recovery, the pace of US interest rate cuts and geopolitical events. The uncertainty is reflected in today’s share price performances, with Rio Tinto down 108p to 5,320p and BHP’s London-listed shares off 38p to 2,340p for a fall of around a fifth in the past year.

Addressing the outlook in today’s results, BHP chief executive Mike Henry described China demand as healthy despite the weakness in housing and said India remained a bright spot. In Australia, the mining industry is facing near-term headwinds in developing resources.

However, he added: “Long term, the mega-trends playing out in the world around us continue to underline our confidence in future demand for steel, non-ferrous metals and fertilisers.”

Half-year revenues increased by 6% to $27.2 billion (£21.6 billion), largely due to higher iron ore and copper prices and offset by an inflation rate of 6.3% across its operating areas in 2023.

Underlying earnings were flat at $6.6 billion (£5.2 billion) but the bottom-line figure fell 86% due to last week’s announcement of impairments worth $5.6 billion (£4.5 billion) in relation to Western Australia nickel and an increased provision on the Samarco dam failure.