Squeezing blood from a stone
We question whether mining companies are in a position to produce a steady stream of dividends.
Some investors currently view resource stocks as an income-generating (yield) play. In my view, that’s in response to mining executives trying to downplay their cyclical issues and suggesting they are in a position to produce a steady stream of dividends, even as prices fall. This could be an attempt to regain some market favour and perhaps some of the inflated valuations that (once overlooked) income-generating stocks enjoy today. It would arguably have been better if these executives had pursued dividends back when they were spending their money on acquisitions and expensive mining capital expenditure. I’m not convinced, however, this is the right strategy to pursue now given the commodity cycle hasn’t fully played out. While off-market buybacks are welcomed when they are used effectively to distribute franking credits, excessive and progressive dividends and high payout ratios will not help deliver the flexible balance sheets these companies will need at the bottom of the cycle.
Even the lowest cost mining producers that manage to deliver high, fully-franked dividends may run the risk of cutting their capital expenditure (growth potential) too far. Emerging producers and companies that are over-indebted will likely run into deeper trouble. Ultimately, dividends may not be sustainable over the long-term.
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