Dividend of the week

This week we are going to start by narrowing our horizons to have a look at a single sector - the global mining sector. This is a controversial choice as a lot of investors have had their fingers badly burnt recently in this sector. But in this column we are only interested in those companies that can afford to pay a dividend and so we hope to avoid the horror stories which have occurred among the mining minnows.

Mining stocks are currently bombed out with commodity prices under pressure and this is a great time for the contrarian investor to take a closer look. A lot of people are fretting about China's growth slowing, but this is inevitable. China's government is increasingly focused on higher-end productivity and wants to move away from the 'made in China' mass production image. But even with this ongoing move to reshape the Chinese economy and the desire of the government to continue to improve the general standard of living, the economy still continues to grow at very high rates, illustrated by the latest quarterly figures which showed growth of 7.5 per cent.

So, coupled with the news coming out of America, that means the two largest economies in the world are growing. It might not be full steam ahead, but the US is certainly moving through the gears and China is in cruise control.

It does look as though the global mining sector may have bottomed out and, if that is the case, the upside could be very considerable. Using the DividendMax screening tools, the initial screen for the mining sector globally gives us a list of 18 stocks covered by DividendMax. And we want yield so anything with a dividend yield of less than 2 per cent is eliminated - this sees Randgold Resources and Lonmin dropped.

We are looking for miners of a decent scale so we eliminate anything with a market cap below £1bn. This accounts for African Barrick Gold, Petropavlovsk, New World Resources, Hochschild and Nyrstar, leaving the following eleven stocks:

Eurasian Natural Resources Corporation (ENRC), Freeport-McMoRan Copper and Gold (NYSE:FCX), Anglo American (AAL), Fresnillo (FRES), BHP Billiton (BLT), Glencore Xstrata (GLEN), Vedanta Resources (VED), Polymetal International (POLY), Rio Tinto (RIO), Kazakhmys (KAZ) and Antofagasta (ANTO).

We have seen recently how exposure to a single commodity can damage the shares of mining stocks very severely; witness Petropavlovsk (POG) and African Barrick Gold (ABG), so we are going to focus on the diversified miners, thus eliminating gold and silver producers, Polymetal International and Fresnillo, and copper-focused Kazakhmys and Antofagasta. ENRC is subject to a takeover proposal so is also eliminated.

This leaves US copper and gold giant Freeport-McMoRan, Anglo American, BHP Billiton, Glencore Xstrata, Vedanta Resources and Rio Tinto.

At this point we can look at the fundamentals:

It cannot be argued that any of these stocks are expensive so we are going to have to eliminate further on more than the pure numbers. Vedanta and Freeport are eliminated on yield grounds (neither are helped by the fact they have both recently gone ex-dividend) Glencore Xstrata has just completed its mega merger and, while there should be much in the way of cost saving and synergies, it took a long time to complete and we should be looking at revisiting the company in 12 months’ time; when the success or otherwise of the merger can be better evaluated.

We used to like Anglo American but, from a dividend perspective, it disastrously scrapped its dividend in 2009. Many of its competitors scaled back dividend payments through the worst of the post credit crunch period, but very few cut the dividend altogether. Anglo reports its 2013 interim results on 26 July. After a battering over the past two years, its shares are beginning to look reasonable value at the moment.

BHP Billiton is very robust. While most of the other miners, excluding Vedanta (which was unlucky not to make the cut having just gone ex-div), have had to cut or reduce their dividends in the great recession, BHP has continued to increase its dividend. Full year 2013 numbers are released on 20 August so we should be looking at the 2014 forward price to earnings ratio, which brings it down to 10.6x. BHP’s 2013 production report was released last week and it looked promising for the final results.

Rio Tinto really does look good value on 8.3x earnings. On 8 August, it announces half yearly results for 2013. They go ex-dividend on 14 August. As with BHP, Rio’s recent production report signalled good operational progress in recent months.

Let’s have a look at the dividends paid by each company over the past six years:

Anglo American

BHP Billiton

Rio Tinto

So, six years on, Anglo American is only paying out 60 per cent of what it was paying in 2006. Rio Tinto has nearly doubled its dividend in the same timeframe and BHP Billiton has increased its payout by 356 per cent.

It is a very close call between Rio Tinto and BHP Billiton. But for its consistent track record through the great recession, the larger increases in its dividends and the recent very solid production report, the dividend of the week is BHP Billiton.

We are estimating the next three dividends to be 38.5p, 38.2p and 42.0p The shares closed at 1863p on Friday and at this price will generate a return of 5.68 per cent annualised over a 14-month period.

BHP Billiton yield calculation:

38.5 + 38.2 + 42.0 = 118.7p between now and 3/9/2014 (approximate ex-dividend date of the third dividend)

Ergo 118.7p / 1863 = 6.37% 6.37% annualised = (6.37x365) / 409*= 5.68%

*Number of days until theoretical ex-dividend of the third dividend.

Note that if the dividend forecasts are correct, the actual yield (which DividendMax calls the ‘Optimized yield) is affected by two factors; the share price and the proximity to ex-dividend dates. DividendMax performs these calculations daily against hundreds of stocks in the UK and overseas producing new lists every day as prices change, dividends change and ex-dividend dates approach.

For more information about Mark Riding and DividendMax, and how its proprietary systems work, visit www.dividendmax.co.uk