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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.


While every care has been taken in the preparation of this information, neither AMP Capital Investors Limited (ABN 59 001 777 591 AFSL 232497) nor any member of the AMP Group make any representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This content has been prepared for the purpose of providing general information only, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this content, and seek professional advice, having regard to their objectives, financial situation and needs. © Copyright 2015 AMP Capital Investors Limited. All rights reserved.

Content sourced from Cuffelinks and livewire does not represent the views of AMP Capital or any member of the AMP Group.

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