04 Apr 2 Surprising Australian Dividend Opportunities
When it comes to looking for dividends from Australian companies, most investors turn straight to the banks or Telstra.
But there are many others out there, particularly if you are willing to think differently about the future. Here are two we think can do well over the next 3 to 5 years.
Just as Australia seems to cycle between drought and flood, so too does mining investment seem to cycle between boom and bust.
Ever since European settlement of Australia, a sequence of mining booms have been a powerful force shaping the Australian economy.
In the 1850s we had the gold rush, the 1960s had a mineral and energy rush, the 1970s and 80s was another energy boom and then the great commodity boom from 2005 led by the industrialisation of China purchasing Iron and Copper.
Mining companies are not traditionally thought of as great dividend payers. Their income goes up and down with the general commodity boom-bust cycle.
We have reason to believe we are at the start of a new commodity cycle led by a change in the way we want to make energy, away from carbon and towards electricity, in the form of cars and houses. This should fuel increased cash flow for many years to come.
Mining companies themselves have been cutting back on exploration of new sources, reducing costs in the process, but this process also reduces future available supply. With nothing new coming online, existing resources are in higher demand and that drives up the price of the commodity. Which in turn ensures existing mines remain profitable for many years to come.
What do these mining companies do with all that extra cash they generate when they don’t need to spend it on new exploration? They return it to shareholders in the form of dividends.
New Hope (NHC) – Australian Coal Miner.
What? Coal? But we aren’t going to use coal anymore I hear you say.
Much to the disappointment of the activists that frustratingly shut our roads, the fact is – until we have alternative forms of power generation, we simply cannot reduce our reliance on coal. Unless you don’t want electricity anymore that is.
But I’m guessing you do. In fact, I’m guessing you want even more, because that Telsa on your drive now needs electricity to run whereas your old car ran on oil. Now you need electricity to power your car AND your house. That sounds like increasing demand on our electrical production overall and where is this new electricity supply going to come from?
Yes, we will build renewable sources. But that takes time. It even needs energy supply just to build the things that are going to make energy.
So coal isn’t going anywhere for some time. And that is why the coal price has been rising
This was evident from New Hopes’s stellar interim result. Coal production was the same as last year, but sale prices were much higher.
Realised prices went from $78 a tonne to $192 a tonne. Net profit went from less than $1m to $479m. Operating cash flow rose over 600% to $452m
This isn’t a one-off because coal demand isn’t decreasing. Yet.
In fact, China is building even more coal fired power plants.
Morrison knows Australia cannot move away from coal which is why he refused to reduce the reliance on coal at the recent Cop26 international meeting.
The New Hope share price has been marching higher, which is no surprise given the improved profitability of its mines.
With all this cash lying around New Hope has decided to return it to shareholders in the form of a normal dividend of 17 cents per share and a special dividend of 13 cents. That means that New Hope will pay 30 cents per share. For the half-year. Fully franked.
30c fully franked at a share price of $3.50 equals a before tax yield of 12.2%. Bear in mind – this is just for the HALF YEAR. It is possible New Hope ends up yielding 25%-30% this year.
New Hope will go ex-dividend on April 14th, so you still have time to buy the share and take delivery of the dividend.
We expect a similar result, if not better, in the second half of the year.
BHP – The Worlds Best Miner
BHP has never been a go-to dividend-paying stock. Until now.
BHP today is a very different beast to the BHP of 10 years ago. The largess and excesses of the past have gone and it is now a lean operator that owns some very major assets
We are disappointed they will be exiting the oil business but owners of BHP when it divests the assets to Woodside will receive Woodside shares so in effect still own those very same assets.
The majority of earnings come from iron ore, which took a dive last year but has since started to recover.
Copper is also a major earner and that continues to appreciate
So it came as no surprise when BHP announced an interim result with earnings up 57% on last year, mainly on the back of increased commodity prices.
After wasting the greatest commodities boom in history a decade ago, BHP spent years in corporate purgatory, cutting costs, raising productivity, and thoughtfully changing its business to keep only the best-returning assets. Capital allocation, once terrifying, has been splendid for years.
This story is the same across just about all mining companies. When the demand for commodities shrank 10 years ago, they all cut back on capital expenditure for new resources. For a decade no-one has really been out looking for new deposits. We are still running on the old mines and that means limited supply.
When you have limited supply but the same demand, price goes up. This is why we are seeing commodity prices increasing across the board. Now we have highly profitable assets inside a lean corporate structure.
But you can’t just go out and find another Olympic Dam mine easily. It takes a long time. It will happen, as increased prices will drive more capital expenditure, but don’t expect to see many new resources come online in the next 5 years.
This means commodity prices and profits will remain for a long time yet. in fact, it is likely commodity prices continue to appreciate.
BHP just recently paid out its interim dividend of $2.08 fully franked, up from the $1.31 of same time last year.
Assuming the final dividend is the same as last year (we think it will be higher) the before tax annual yield on BHP is presently 13%.
We haven’t even begun to speak about our excitement for uranium (BHP has biggest uranium mine in Australia) nor its massive Jansen potash deposit that it hasn’t even started mining yet (Potash is a fertilizer and until very recently, Russia was the worlds largest global exporter of fertilizer – who can possibly make up the shortfall?)