Remember themomentin those old British war movies as anxioustroopsawaitthe enemy attack? Its the waiting I cant stand, someone invariably mutters.Thats how I feel about the dividends at embattled mining giants BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO). Enemy forces are amassing, as China slows and commodity prices crash, andinvestorsare just waiting, sweating, and trying to keep theirnerve.
Surely management at BHP Billitonhas to accept the inevitable sooner rather than later. For crying out loud, the stock is currently yielding 13.9% and the share price is down 53% in a year to hit a 10-year low.It trades at just over seven times earnings. Earnings per share are forecast to fall a whopping 60% in the year to June. Managementexpects to book a $7.2bn impairment charge on itsUS shale oil and gas assets,the second in six months. How long can the line hold?
BHP Billiton isnt just exposed to metals misery, its a large player in the beleaguered oil market, where talk has turned crazy, with predictions of $10 barrels, and the IEA warning that the world could drown in oversupply. Yes, I know the writedowns are non-cash and shouldntdirectly hitthe dividend payment, but thats a detail. The yield is nearly 14% and when Anglo American recently hit that level, its defences were breached.
BHP hasntcut its dividendsince the merger with Billiton in 2001, so theres pride at stake, as well as the credit rating. Management even held the line after profits mined 10-yearlowsin August. But now it has to face up to todays painful reality, and retrench.Well know more next month.
The numbers arent quite so desperate at Rio, whichoffers a comparativelymodest dividend yield of 9.2%. The stock ischeap as chips, trading at just 4.7 times earnings. Itsshare price is down 43% over oneyear and 63% over five, pointing to the long-term nature of the decline. The 51% decline in EPS last year, plus a forecast 15% dropin 2016, show that even the best-run company cantescapethe commodity rout.
Both Rio and BHP enjoyed some relief on Tuesday after markets decided that 6.9% annual GDP growth in China was better than it could have been, but in todays turbulent markets the next panic attack isnt far away. China isnt just slowing, its shifting its economy from infrastructure and exports, to consumption and services. That willinevitably reduceits thirst for raw materials even if it avoids the dreadedhard landing.
At least Rio is shielded from the oil price collapse (maybe diversification isnt always so clever). Rioalso boastslower costs than BHP, and a stronger balance sheet. But with the price of iron ore (its main resource) expected to stay low for a couple of years, it has little hope of respite. Rios defences may last longer than BHPs, but unless relief comes in the shape of a commodity price rebound, at some point they too will crack.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.