I’m seeing some very attractive dividend shares on the UK stock market right now. Some are even offering yields of 10% or more. But a couple of the biggest have been cut in recent weeks.
When AJ Bell released its latest Dividend Dashboard, Rio Tinto headed the list with a forecast yield of 13.5%.
Also among the biggest FTSE 100 dividends, Glencore had a predicted yield of 11.6%. Anglo American was slightly behind on a more modest but still beefy 7%.
We’ve since seen dividend cuts in the mining sector, alongside first-half results. So are big yields on the way out?
Dividend cuts
Rio Tinto cut its interim dividend by 29% from the first half of 2021. That’s still 72% ahead of 2020, mind. And it’s the company’s “second highest ever interim dividend.”
If repeated in the second half, it would still mean 9% for the year.
Anglo American has similarly sliced its interim dividend, by 27%. Both these miners also paid out special dividends in 2021, and there’s none of that at the interim stage this year.
Extra payout
Glencore, on the other hand, announced a bumper extra payout of $4.5bn. It includes $1.45bn as a special dividend, and a $3bn share buyback. It’s all down to surplus cash generation from “materially higher oil, gas and coal prices.”
Does this make Glencore immune to the pressures facing the wider mining industry? I don’t think so. A look at the price-to-earnings (P/E) valuations of these three companies is telling.
On a trailing basis, Rio Tinto is on a P/E ratio of only 5.4. And Anglo American is only slightly higher at 6. Glencore is still on a relatively high P/E of 14, presumably because of the boost it’s getting from oil and coal.
Cycles
Low share prices are helping to keep mining dividend yields high, despite cash payments actually falling. And it’s all down to the cyclical nature of the industry.
The global economic squeeze is hitting demand. And more specifically, China’s zero-Covid policy is damaging the country’s productivity. China has provided the big impetus for metals and minerals demand for years now.
When the mining sector is getting past its peak, we typically see what we’re seeing now. That is, P/E multiples decline on falling share prices, and dividends are cut.
Not so bad?
This time, though, I reckon the downturn could easily turn out to be short-lived. I don’t see how China’s Covid policy can work, and I think the country will eventually have to adapt to living with the virus like the rest of us.
I do, however, think it’s likely that the sector could experience more pain from falling demand in the coming months. And I might well be too optimistic about any likely rebound timescale.
So what’s the solution? I think investors who buy mining shares for the long term can still do very well. And I see today’s share prices as providing good value. But with cycles sometimes rather lengthy, I’d only buy for for the very long term.