“What this means in practice is that they’re demerging or selling their fossil fuel businesses – high cash flow, mature businesses with incremental [capital expenditure] – and pivoting towards growth areas, things like nickel which is their lowest margin division, and copper, and increase spend on production.”
BHP’s US90¢ ($1.30) interim dividend was high by historical standards but lower than last year’s $US1.50 interim dividend and missed RBC’s estimate by 11 per cent. It is worth $US4.6 billion and equivalent to a payout ratio of 69 per cent, lower than the 78 per cent paid-out this time last year.
Fortescue’s interim dividend was lower in absolute terms, but also lower as a percentage of profits. The miner returned 65 per cent of earnings in the form of its interim dividend, down from 70 per cent last year.
BHP chief executive Mike Henry defended the lower payout ratio, arguing the company had supercharged the retirement portfolios of millions of Australians, speaking to analysts on Tuesday.
“BHP alone is held directly or indirectly by 17 million Australians,” he said.
“BHP alone makes up well over 20 per cent of all dividends paid by the ASX 200 [in 2022], roughly 10 per cent or more of all corporate tax paid in Australia, if you scale that up for the resources industry the numbers are even larger.”
Resource companies were among the biggest dividend payers on the ASX last year when BHP paid out record dividends worth $US16.5 billion.
Frugal payments come as both businesses look to spend big on decarbonisation efforts.
Fortescue is seeking to become a clean energy superpower via Fortescue Future Industries (FFI).
And BHP’s drive for future-facing minerals came via its $9.6 billion takeover of copper and nickel play OZ Minerals, marking the first major purchase for BHP under Mr Henry. Copper is in huge demand as the world transitions to electric vehicles which are reliant on the world’s new favourite industrial metal.
Martin Currie chief investment officer Reece Birtles warned resource dividends are inherently cyclical, bound to commodity prices and capital expenditure requirements.
However, he doesn’t expect to see a dramatic return to 2015-16, when BHP’s dividend collapsed and it abandoned its historic progressive payout policy, saying iron ore prices are more resilient.
“The risky point for resources stocks on dividends is when commodity prices come off and they’re spending lots of capex – that was the worst part of the cycle in 2015 for companies like BHP,” he said.
“There’s no doubt they’re spending plenty of capex at the moment so their sensitivity to commodity price falls is higher, but most of the commodity prices are strong at the moment with China reopening and stronger going into the next half.”
Prices have rebounded 60 per cent from late-October lows at $U78 a tonne to $US125 a tonne, largely fuelled by traders repositioning for China’s reopening.
Plato Investment Management’s Don Hamson expects ASX 200 dividends to be somewhat challenged this year, with resources making up a big chunk of income: “It’s definitely tougher, it’s not going to be an easy year, but there are strong dividends in other sectors, consumer staples, the banks,” he said.
DNR’s Mr Kelly is finding better value in ASX-listed insurers and what he regards as defensive consumer plays, namely Telstra, TPG and Lottery Corporation.