Mining giants on course to dish out bumper dividends

We examine whether investors can expect to enjoy juicy payouts from the big miners soon. 

The prospect of bumper dividends from BHP (LSE:BHP) and Anglo American (LSE:AAL) was kept alive today after their iron ore operations capitalised on rising prices amid the surge in Chinese demand.

The pair's production figures for the quarter to 30 June were generally well received ahead of BHP's annual results on 17 August and Anglo American's half-year results on 29 July.

Analysts at UBS recently predicted that the world's five biggest iron ore producers, which also include Glencore (LSE:GLEN), Rio Tinto (LSE:RIO) and Fortescue (ASX:FMG), could return $26 billion to shareholders with their results this summer.

This is based on expectations that Anglo American will surprise the City by paying out 60% of earnings compared with 40% previously, and that BHP will deliver better-than-expected results alongside a pay-out ratio of 85%.

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BHP's dividend policy is for a minimum of 50% of earnings, but UBS noted earlier this month that the mining giant had actually paid an average ratio of 70% in the last eight reporting periods.

The lowest was 63% last August, when Covid-19 caution was still a factor.

UBS has said it expects a final dividend of 198 cents a share, which is 9% ahead of City's forecasts as the company will have flexibility to return most of its free cash flow because net debt is at the low end of the target range.

A return of cash through a buyback is less likely due to the current elevated share price.

BHP's update, published overnight, revealed that record production in Western Australia helped the company capitalise on a 52% surge in the average realised price of iron ore in the June half-year.

Demand has been boosted by Chinese steelmakers and the wider global economic recovery, as well as supply issues in Brazil.

Its iron ore production for the year to 30 June grew 2.1% to 253.5 million tonnes, while BHP expects 2022 output to be between 249 million tonnes and 259 million tonnes.

UBS, however, is more cautious about prices over the medium-term as supply levels improve.

BHP's copper operations also benefited from an 82% price rise over the same six-month period, driven by pent-up demand and the greening of the economy.

A strong finish to the year failed to prevent copper output falling 5% overall due to Covid-19 related challenges in Chile.

Its other divisions span petroleum, metallurgical coal and nickel, with chief executive Mike Henry happy the company is performing well. He added: “Our portfolio is positively leveraged to the mega-trends of decarbonisation, electrification and population growth.”

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There was a similar message today from Anglo American's Mark Cutifani after the company's iron ore production increased 6%, copper by 2% and platinum group metals jumped 59% in the second quarter versus a year ago.

The De Beers owner has also completed an earlier-than-expected exit from thermal coal as it focuses on “future-enabling metals and minerals” for decarbonising energy and transport.

A stronger balance sheet and robust commodity prices mean UBS expects Anglo to award an interim dividend of $2.29 a share based on a chunkier payout ratio of 60%.

The mining giant has maintained the ratio at 40% since the dividend was restarted in 2017, only topping up returns to shareholders in 2019 with a $1 billion share buyback programme.