Stockpedia's Ben Hobson has screened the highly cyclical mining sector for the biggest yields available.
Shares in a number of large and mid-cap mining stocks have been on a strong run over the past two years. In fact, we've seen several of them break out sharply in the first quarter of 2019.
According to the latest figures, it's not just price growth we're seeing from this sector, it's impressive dividend growth too. So what should investors make of this?
Mining of course is one of those highly cyclical sectors that has a habit of catching us unaware. As recently as 2015 and 2016 the whole sector fell out of favour and drastically underperformed the market. Holding those stocks might have felt daft, but in the years that followed they came racing back.
The causes of these swings are varied. Share prices are naturally sensitive to commodity prices, and the prices of coal and metals are driven by global supply and demand. Then you have to consider how individual companies are being run. Many were guilty of over-leveraging and over-expanding in the mining boom early this century. When supply fell away and uncertainty swept in, it took years to unwind it all.
What we've seen over the past few years is the end of that cyclical swing. Some of the largest companies have stripped back their businesses. Assets have been sold, balance sheets have been strengthened and commodity prices have been rising.
The first signs of this kind of move come when deep value investors start smiling. After years of being out of the money, mining stocks can move very rapidly and it's the brave long-term holders that benefit first. But the moves in very large mining stocks can be swift and spectacular.
Just two years ago, the diamonds and precious metals group Anglo American (LSE:AAL) was worth around £7 billion. Its shares had actually been rising over the previous 12 months, so it had already moved off its cyclical low. But in the two years since, Anglo American has increased in value to more like £30 billion. You don’t often see such sizeable moves in large stocks elsewhere in the market.
Yet because of their cyclical nature, investors are always wary of miners. Even after a big leap in price, many still attract fairly low ratings. Anglo American trades on a price-earnings ratio of 13 times, which is forecast to fall to just 9 times next year. That doesn't shout that it’s is a hugely popular stock.
According to the latest dividend data from Link Asset Services, mining has also been the source of the greatest dividend growth in 2019 so far. Asset sales triggered a massive £1.7 billion special payout from BHP Group (LSE:BHP), and another is expected from its fellow mining blue chip Rio Tinto (LSE:RIO). But special payouts aside, mining still managed to outpace most other sectors in Q1 when it came to dividend growth.
And while growth rates are expected to settle down as the year progresses, Link are still forecasting that the market yield will remain well above its long term average this year - and that payouts will remain strong.
With all this in mind, we’ve screened the market for the biggest yields around in the mining sector right now. The screen simply looks for the highest 1-year forecast yield in mining & metals stocks across the FTSE 350. We've included the StockRank, which scores the overall quality, value and momentum of each stock - from zero (poor) to 100 (excellent).
On top of that we've noted the number of dividend increases from each company over the past 10 years as a proxy for progressive payout policies. We've also added the dividend cover for these stocks - most of which are well ahead of the 1.5-times that's generally accepted as a reasonable level.
|Name||Forecast P/E Ratio||Forecast Yield %||Forecast Dividend Cover||Dividend increases (past 10 years)||Stock Rank|
As you can see, the valuations of these stocks - even after a tearing run for many of them in recent months - are still fairly tame for the most part. While companies like Evraz (LSE:EVR), BHP, Rio Tinto and Polymetal (LSE:POLY) offer some attractive numbers in terms of yield and StockRank scores, it shows how investors are cool on the cyclical uncertainty that comes with the mining sector.
This year some of the biggest equity market uncertainties are likely to be around Brexit and its impact on domestic economics and the value of sterling.
In these kinds of conditions it could be worth considering the diversification benefits of a sector that is quite separate from the home market. And while mining stocks come with their own challenges, the price performance and yields on offer are a reminder why many find them so appealing.
Stockopedia helps individual investors beat the stockmarket by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions.
Interactive Investor readers can get a free 14-day trial of Stockopedia by clicking here.
These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.