Last year APRA ordered the big four banks to slash their dividends to conserve capital due to the COVID-19 pandemic; not that it was required, as boards had already decided to hoard as much capital as they could. Shareholders were dealt a rather large blow, especially self-retirees and super fund members. Banks have always been a popular selection for income due to their high after-tax yield, usually as high as 8 per cent, at a time when interest rates are close to nothing.
So where did yield-hungry investors go?
Many feared this year would turn out very different. Covid-19 ravaged, high debt and lower sales; many were expecting earnings to be decimated and dividends would be hit. And so, investors shifted their reliance on income from the big banks to stocks that stood to benefit from Covid-19 (covid winners) and commodity-related stocks relatively unaffected by Covid such as BHP, RIO and FMG.
Fast-forward to today, and things didn’t turn out as bad as once thought. Sure, dividends fell, but earnings weren’t as bad as expected. According to Commsec, “dividends fell by 36 per cent from a year ago, with only 69 per cent of companies paying dividends compared to 86 per cent.”
$179.30 (A$209) a tonne. That’s a change of roughly 129 per cent in the space of a year.
Some have labelled the big three iron ore miners as the new “banks,” and for good reason. According to the AFR “Australia’s annual iron ore export revenue is poised to crack $100 billion – a record for any commodity – as prices of the steel-making ingredient surge on the back of mine shutdowns in Brazil and strong demand from a resurgent post-COVID-19 China.” And this comes on the back of an iron ore price that has moved from well below US$100 a tonne before Covid-19 to a record US237.57 a tonne in May, and US$209.10 a tonne at time of writing.
The rise has the iron ore miners pushing past $150 billion in exports hit in the first half of 2020 while BHP and RIO, which both have extremely low operating costs, are lapping up these super-profits.
In fact, Australian iron ore miners are earning more than they did during the mining boom. The resurgence comes with Beijing’s heavy spending on economic stimulus, particularly infrastructure, during the pandemic. Australia is the main producer of iron ore with a 53 per cent dominance of world iron ore exports. Although relations between China and Australia have soured, both countries rely on each other and are joined to the hip when it comes to iron ore.
The prices have surprised analysts. (Brazil’s full return to production after tailings dam disasters in 2015 and 2019 has not yet occurred, as regulators still want to see changes in practices. The Brumadinho dam disaster in 2019 saw 90 million tonnes stripped from global seaborne supply.) However, investors must be mindful of whether the bull run in iron ore will continue. UBS has warned that prices were predicted to fall, saying they would hit US$100 a tonne by the end of calendar year 2021 and approximately US$75 a tonne by the end of 2023, with Brazilian supply recovering and Chinese demand softening. That puts iron ore plays such as FMG and RIO in the firing line. As most commodity cycles go through boom and busts, we think the iron ore boom has hit its peak. The most recent updates included:
- FMG delivered a $1 final dividend – up from 23 cents.
- BHP’s delivered a US55 cents a share dividend.
- Rio Tinto’s delivered a $US1.55 a share dividend.
Looking at the latest round of broker updates, Rio Tinto is favoured at the present time, with its large iron ore exposure (almost 60% of earnings( seeing four buy recommendations and three holds. BHP has three buys and four holds, while Fortescue is more mixed with three buys, three holds and one sell from Morgan Stanley. Whilst most brokers agree that current ore prices aren’t sustainable, they are generally bullish about the super-profits and potential for special dividends as exports continue to hit records.