FTSE 100 companies will earn a record £169.7bn in 2022, reckons investment platform AJ Bell. In total, they will return £114bn of that to shareholders, which so far looks likely to consist of £81.2bn in dividends and £32.7bn in buybacks. The biggest payer is mining giant Rio Tinto, which shows just how far miners have come since the last commodity cycle. Boom and bust cycles have been a feature of mining ever since humans first discovered the dirt beneath their feet might be valuable. The rise of China in the mid-1990s and early 2000s set off a super cycle, which saw prices boom for the best part of two decades.
Miners borrowed huge sums to expand their output to meet what seemed like never-ending demand. However, when the bubble burst in 2011 and a bear market in commodity prices ensued, miners bore the brunt of the financial fallout. In 2015, Morgan Stanley analysts estimated that between 2005 and 2014, the three largest miners – Rio, BHP and Anglo American – had spent $246bn on capital projects, and as a result, overloaded the market. Prices crashed as supply surged and the trio lost $48bn in total between 2011 and 2014.
Yet that rude awakening set the scene for today’s boom. Miners mothballed extravagant projects and slashed costs. Now they prioritise financial stability and investor returns over growth, eschewing debt-funded capital growth in favour of funding from cashflow. Investors are reaping the benefits. Take copper, used in everything from renewable energy projects to mobile phones. As miners have tightened their belts over the past seven years, the copper supply has dropped even as demand has grown. Former Glencore chief executive Ivan Glasenberg told the Qatar Economic Forum last year that the copper supply needs to double by 2050 to meet demand.
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A similar story is being played out across other commodities – good news for the big players. BHP (LSE: BHP) and Rio Tinto (LSE: RIO) mine everything from iron ore to rare earth metals. In a volatile, cyclical industry, this diversification is appealing. Rio reported record results for 2021, and declared its highest dividend ever of $10.40 a share, including a $2.47 special dividend. It ended the year with $1.6bn of net cash. Analysts expect a $8.62 payout for 2022, giving a forward yield of 10.9%. In its first half, BHP’s profits jumped, net debt fell to $4.2bn from $12bn and it announced an interim dividend of $1.50. Analysts expect a full-year dividend of $4.34, giving a prospective yield of 9.4%.
These yields may not last if commodity prices start to moderate, but with little debt, these miners have plenty of financial flexibility to balance investor returns and growth spending.
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