It has been a rough year for FTSE 100-listed mining giantsBHP Billiton (LSE: BLT)andRio Tinto (LSE: RIO), which have fallen 33% and 25% respectively in the past 12months. As China their main customer continues to struggle, it would take a brave investor to buy either company right now. But fortune favours the brave, and at todays cut-price valuations both stocks also have plenty to offer rock-hard investors.
The most obvious temptation are the mineral-richincome streams, with BLT and RIO currently yielding an astonishing 7.83% and 5.83% respectively. These were traditionallyconsidered growth stocksrather than income machines, but recent travails have reversed that. However, BHP Billitons yield has edged into the too good to be true categoryand analysts are now questioning its sustainability.
In fact, SocGen has just downgraded BHP Billiton to hold from buy because of the pressure its generousdividends are placing on the balance sheet. Management is still hanging tough, recently hikingthe full-year dividend by 2.5% to 124 cents, despite a drop of around 50% both in operating profits and underlying earnings per share. It haspartly funded this through an impressive $4.1bn cost-cutting programme, but you can only cut so much until future growth prospects are put at risk.
Rios yield may be lower but management policy has been even more progressive, hiking the 2015 interim dividend 12% to 107.5 cents. SocGen reckons that Riosstronger balance sheet points to a more sustainable yield, and has upgraded the miner from hold to buy. Confirming this, Digital Look putsBLTs dividend cover at just 1 times, against 2.3 times for Rio Tinto.
I have always been wary of Rio because it is so heavily exposed to one mineral in particular, iron ore, which makes up about 90% of its production. But this has worked in its favour as the iron ore price has stabilisedin recent months. Although it is down from around $80 per metric tonne to around $56 over the last year, the price avoided crashing through $50 as anticipated, and has even crept up over the last six months. Other metals have had a tougher time either side of Chinas Black Monday, for example copper is down nearly 20% since May from $2.90 apoundto around $2.35 today.
RIO Versus BLT
A quick look at the numbers showsRio TintorepeatedlyoutscoringBHP Billiton. Itsoperating margins are 23.8%, against BLTs 18.2%. Return on capital employed (ROCE) is 11.3% against 7.9%. Despite this, Rio Tintois notably cheaper, trading at 6.8 times earnings against a surprisingly high valuation of 13.1 times at BHP Billiton.
In the wake ofthe death of the commodity super cycle, investors should approach both stocks with caution. One dismalnumber is common to both: BHP Billitons earnings per share are expected to fall by 53% in the year to 30 June 2016, while Rio Tintos are forecast to drop 49% this calendar year.Next year, Rios EPS are forecast to fall just 3%, suggesting the worst may be over. Well see. Both stocks face trouble ahead, butBHP Billitons path looksbumpier.
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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.