Anglo American (LSE: AAL) was going to have to cut its dividend sooner or later, so itsbetter it acted sooner rather than let the uncertainty drag on into next year. Unfortunately, all it has done is sharpen the focus on thoseFTSE 100 mining giants that have yet to cut theirdividends,BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO).
Cuts, cuts, cuts
Rather than the end of the story, this is beginning to look like the startof a trend for miners. With share prices plunging, juicy yields were the main reason to stay true tothe commodity sector but now theseare being squeezed dry. Anglo-American tried fighting the inevitablewith cost slashingand asset disposals, but had to give way in the end. The yield hit an unsustainable 14% by the time it acted, announcing last week that it would axeits workforce by more than half from 135,000 to 50,000, and suspend dividend right to the end of next year.
That will save Anglo Americanabout 1bn a year, money it desperately needs to survive lower prices. Even when the dividend does return, it will no longer be progressive, something management claims is unaffordable in the notoriously cyclical mining sector.
Even more worryingly for BHP Billiton and Rio Tinto, by slashing 1bn from capex and canning plans for new mines its effectively saying there is enough commodity supply today to last for yearsto come.
Rio Tinto quicklyfollowed Anglo Americans lead to announce $1.5bn of capex cuts bythe end of next year. There was no talk about cutting the dividend, but markets seem to be pricing that in, with the share price down10% in the last week. Thats the problem when the dividend comes under pressure, the share price collapses as well.
BHP Billiton has also been burning through cash and looks even more vulnerable. Its share price is down more than 12% in the past week. Citi reckons it will burnthrough around $3bn a year. With BHP hit by institutional downgrades, its payout must surely be on borrowed time.
In A Hole
The situation at BHP Billiton and Rio Tinto isnt quite as drasticas at Anglo American. Their yields havent yet hitdouble digits, but BHP is close at 9.23%, so you can draw your own conclusions. Riocurrently yields 7.15%. Commodity prices continue to fall, with iron ore hittinga seven-year low of around $40 a tonne. Both companies are clearly at the sharp end of a cyclical shift in China, a shift that only looks set to sharpen.
The mining sector is notoriously cyclical. At some point, all this cost slashing will lead to supply shortages and force up prices again, but it would take an optimist to suggest were at that point now. Larger operatorsappear to be following the Saudi strategy of maintaining high-margin production to drive out low-margin rivals and hang onto market share. Commodity prices may have further to fall in the new year. Unless they recover sharply, I fear that BHP Billiton and Rio Tintos dividends willfall as well.
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Harvey Jones has no position in any shares mentioned. 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.