Two giants of the global mining industry, already beset by plummeting metal prices, now face a new challenge – preparing their shareholders for sharply lower dividends.
BHP Billiton Ltd. and Rio Tinto PLC have both said in the past that they are committed to the payouts, but most observers doubt that sticking to the dividends is practical in today’s bleak environment for commodity producers.
At their current share prices in London, BHP’s dividend works out to a yield of more than 14 per cent, while Rio’s is equivalent to a payout of nearly 10 per cent.
Those are remarkably high yields for companies with investment-grade credit ratings and reflect the degree to which the share prices of the two miners have faded since the height of the commodity boom. The losses show no signs of letting up: BHP’s stock declined 19 per cent in the first two weeks of this year, while Rio’s is off 17 per cent.
In theory, slashing dividends should have no further effect on the miners’ share prices. Financial logic says a company can’t increase its economic value by paying out more of its cash.
However, cutting the payouts would qualify as a deeply symbolic retreat and may put off yield-hungry investors.
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