Two of the largest metals and mining companies in the world – BHP Group (LON 🙂 (NYSE 🙂 and Rio Tinto (LON 🙂 (NYSE 🙂 – have seen tremendous rallies in stock prices since early spring.
Markets have become increasingly volatile in recent days, leaving investors wondering if it is time to call at the till. So, which of these two heavyweights could be a better buy as we approach the last quarter of the year? Let's take a closer look.
BHP
Headquartered in Melbourne, Australia, BHP has operations in four segments: coal, iron ore and petroleum.
It buys and exploits large resources that produce long-lived resources such as coal mines or iron quarries. Considered some of the highest quality in the world, its portfolio of assets generates significant free cash flow.
On August 18, the group published its results for the year ending June 30. Analysts were not impressed by the mediocre figures, which showed lower annual sales and profits than expected. Net operating cash flow declined 10% year on year, while net debt increased 28% to more than $ 12 billion (or £ 9.14 billion).
Investors also frowned when the board cut the full-year dividend by 10%. It announced a final dividend of 55 cents per share, meaning the total payout in 2020 will be $ 1.20 per share. In 2019 it was $ 1.33.
Management pointed to the challenges of the COVID-19 pandemic and the ongoing volatility in commodity prices. The decline in net operating cash flow reflected weaker coal and petroleum raw material prices, partially offset by stronger iron ore prices. Social unrest in Chile was also one of the points raised in the report.
Since the beginning of the year, the major stocks have been roughly flat, hovering around 1730p (US $ 55). Forward P / E and P / S are at 13.59 and 3.33 respectively. Given the price increase since March and the mediocre results earlier this week, we expect BHP shares to come under pressure. A possible fall in the stock price of 7-10% would make the stocks attractive for long-term portfolios.
Rio Tinto
British-Australian Multinational Metals and Mining Corporation, Rio Tinto also owns several world-class assets in various commodities.
It has generated strong free cash flow in recent years, returning most of it to shareholders through dividends and buybacks. Although the board cut dividends in February, the dividend yield is 6.1% (8.7% in the US).
On July 29, the group published half-year results. A 7.3% increase in iron ore production was one of the highlights of the report. Iron ore, which accounted for about 90% of profits, saw strong demand from China. However, the first half of the year saw weak global demand for aluminum and a decline in diamond sales. Finally, copper production remained virtually unchanged. Nonetheless, management reaffirmed the production and cost guidelines for 2020.
So far this year, the RIO stock is up about 3% and is hovering at 4,664p (US $ 61.50). Forward P / E and P / S are at 10.52 and 2.86 respectively. We also expect short-term profit-taking in the stock, which could push it to the 4,300p (US $ 57.50) level.
Bottom Line
While & # 39; is nearly impossible to completely avoid the impact of an economic recession on a stock portfolio, it it is possible to minimize these by buying strong stocks that regularly pay dividends.
Despite the recent dividend cut by BHP and an earlier cut by RIO, both companies provide passive income to shareholders. They are also diversified miners with high-quality assets. However, the volatility in the commodity markets affects the prices of these commodities.
Since the last financial crisis of 2008-2009, commodity cycles have been largely driven by China. Therefore, if the coming months show a decline in this Chinese demand, it could also affect the results of these companies.
After the US, China is the second largest economy in the world . So markets pay attention to news headlines that may have a Chinese component. However, if history is a guide, markets tend to recover from headlines that turn a profit in the short term. In the long run, global infrastructure spending is likely to increase, driving demand for important raw materials.
In addition, international companies such as BHP Group or Rio Tinto can be particularly attractive to British investors because their fortunes do not depend on the British economy. As such, they could provide immunity from any further turbulence that may arise as a result of the ongoing trade talks with the European Union.
While we would first consider an investment in RIO over BHP, any possible fall in prices in either stock could be seen as an opportunity to buy the stock.
