UBS says look to the iron ore miners for the juiciest cash returns out of the resources sector this reporting season.
Thanks to an iron ore price that was 4 per cent higher half-on-half at $US95 a tonne, Rio Tinto, BHP Group and Fortescue Metals Group look attractive in terms of their ability to sweeten returns and lift profitability.
Coal and base metals prices were generally lower half-on-half, so that could detract from any potential spoils. However, the broker’s broad expectation is that high payout ratios should enable improved returns.
BHP has had form when it comes to returning capital to shareholders in recent periods. Fairfax Media
At Rio, UBS pencils in a dividend of $US5 billion or $US3.08 a share comprised of a $US4 billion ordinary dividend off a 70 per cent payout ratio, and $US1 billion special dividend or US62¢ a share. “We opt for the special given latest buyback now sees Chinalco close to its 15 per cent ownership limit,” the broker says. It’s noticed that Rio tends to pay out 50 per cent at the interim result and 70 per cent at the year-end.
BHP’s 70 per cent payout ratio implies a dividend of US69¢ a share, up 25 per cent, and an on-market buyback is a possibility given its net debt position. That could be worth $US2 billion to $US3 billion. “We note BHP is the only major diversified miner (UK listed) to not have an active buy-back program.”
Fortescue pays out 50 to 80 per cent of net profit, and UBS is looking to 80 per cent for the interim dividend, at 90¢ a share, ahead of the street at 80¢ a share.
At 90¢ a share, that would push net debt to $US2.6 billion, “within the company’s comfort range, so possible, in our view,” UBS says.
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