It can be painful to invest in a downtrodden share that you’re convinced is set for recovery only to see it carry on further down. It’s a feeling many investors in troubled miners Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT) will know only two well, with Rio down 40% over 12 months to 1,870p, and BHP down 52% to 703p over the same period.
But look a little closer and we might be seeing the first signs of spring. Both companies hit low points on 20 January, but since then they’ve been edging back up again — Rio Tinto shares have regained 17% in the past three-and-a-half weeks, with BHP Billiton putting on 19%. So has the bottom finally been passed and is it a great time to buy now?
Dividend cuts
Reporting on 11 February, Rio Tinto maintained its annual dividend at 215 cents per share, but at the same time it told us the inevitable dividend cut would happen in 2016. Suspending the firm’s progressive dividend policy, chairman Jan du Plessis said: “For 2016, we intend that the full-year dividend will not be less than 110 US cents per share.“
That’s good news on two counts. Paying what amounted to a barely-covered 8% yield indefinitely would have been madness. The new dividend should still yield at least 4.1%, which is way ahead of the FTSE 100 average and will still beat any savings account.
Over at BHP Billiton the analysts are still forecasting a dividend yield of nearly 10% for the year ending June. They’re optimistic, I have to give them that. Such a payout wouldn’t even be half covered by forecast earnings and a cut must be nearly an odds-on certainty now. Again, preserving that critical cash would be a very good long-term move and it will be psychologically easier now that Rio Tinto has already broken ranks.
BHP’s operations review for the half looked reasonable. Petroleum production was down 5% and copper down 6%, but iron ore volumes grew by 4% — and chief executive Andrew Mackenzie reckoned the company has the “financial flexibility to manage further volatility and take advantage of the expected recovery in copper and oil over the medium term“.
Commodity turnaround?
Commodity prices might well have bottomed-out too. Iron ore prices have have shown a 6% rise in 2016 so far and copper has picked up a little since mid-January. Could oil have finally passed its nadir too? After dipping below $30 a barrel in January, Brent Crude is now fetching around $34 and there are hints that OPEC might finally act to slow production.
Add to all this that we’ve just had one of the most miserable market months in recent memory in terms of sentiment, and we could be seeing a great combination of factors for Rio Tinto and BHP Billiton investors. Think sensible dividend cuts and cost savings, production holding up, commodities starting their slow recovery, and a time of maximum pessimism.
Time to buy? I reckon you could do worse.