The FTSE 100s big mining stocks, BHP Billiton (LSE: BLT) (NYSE: BBL.US) Rio Tinto (LSE: RIO) (NYSE: RIO.US) and Anglo American (LSE: AAL), have become attractive income plays in recent years all three offer a prospective yield of more than 5%.
Commodity prices are low at the moment, so now could be a good time to top up but which of these three mining giants is the best buy in todays market?
Valuation
All three companies currently trade on similar trailing valuations, but looking ahead with forecast earnings, BHPs share price benefits from a surprising premium:
|
BHP Billiton |
Rio Tinto |
Anglo American |
|
|
Trailing P/E |
11.5 |
10.0 |
9.7 |
|
2015 forecast P/E |
15.0 |
12.1 |
12.0 |
Despite BHPs higher valuation, I think the shares are attractive at the moment. BHPs low costs and efficiency mean that the firms operating margin is currently running at 30%, and its exposure to oil provides useful diversity.
Rio looks cheap, in my view, but Im less convinced about Anglo American, where I believe the risks of further impairments and downgrades are higher.
Dividend yield
Rio, BHP and Anglo all offer a prospective yield of about 5.3%, so theres little to choose between them in this regard.
However, the level of earnings cover for these dividends varies widely, with BHP looking more exposed than its peers:
|
BHP Billiton |
Rio Tinto |
Anglo American |
|
|
2015 forecast dividend cover |
1.25 |
1.55 |
1.58 |
|
2016 forecast dividend cover |
1.18 |
1.73 |
2.1 |
Im not too concerned by this: BHP has made great progress with cost-cutting and expects to improve efficiency still further following the South32 spin off.
Furthermore, I suspect that the oil price may start to recover in the second half of this year, which could feed through to BHPs profits in 2016.
Debt
BHP and Rio both took advantage of strong commodity prices over the last two years to reduce debt levels. This has worked out well, as the price of iron ore has fallen heavily this year, reducing both firms free cash flow.
Unfortunately, Anglo American didnt manage to replicate this success, and the South Africa-based firm expects net debt to rise in 2015.
Even without this, the difference in gearing levels (net debt/book value) between these firms is quite noticeable:
|
BHP Billiton |
Rio Tinto |
Anglo American |
|
|
Net gearing |
31% |
27% |
45% |
Todays best buy?
Ive had my eye on Anglo American as a potential turnaround buy for a while, but Im not sure its cheap enough: despite trading slightly below book value, debt levels are high and still rising.
In todays market, Id much rather buy Rio and BHP, both of which I reckon look good value, and could deliver decent gains over the next couple of years.
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Roland Headowns shares in Rio Tinto and BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
