When global mining giants BHP Billiton Ltd. and Rio Tinto PLC unveil their earnings over the next week, they may give investors more than just happy stories about record profits, soaring commodity prices and bullish outlooks. They may give them cash.
Amid booming markets for copper, aluminum and iron ore, BHP and Rio Tinto are expected to report unprecedented profits and gluts of cash. Some of that money may well find its way back into increased dividends, special dividends and massive share buybacks – making the companies' already attractive stocks look even better to investors.
"We suggest both companies will prove to be a generous source of extraordinary dividends back to shareholders over the next few years," said Canaccord Genuity analysts Damien Hackett and Jeremy Dibb in a research note Monday, in which they increased their stock-target price for Rio Tinto by 50 per cent and for BHP by 25 per cent. "In our view, both companies are going to struggle to spend this money on organic growth projects, and both will find it difficult to find sufficient scale and quality elsewhere [through acquisitions]."
The Canaccord analysts estimated that BHP could generate excess cash flow (beyond capital spending and current regular dividend payments) of more than $15-billion (U.S.), or $2.50 a share, in 2011, while Rio Tinto's excess cash flow could run around $11-billion ($5.80 a share).
Those gaudy financial numbers have been key reasons why investors have already been flocking to the two stocks. Rio Tinto's shares are up 58 per sent in the past year while BHP's are up 40 per cent, and analysts still maintain consensus "buy" ratings on both companies. But now, investors are increasingly clamouring for the companies to pass some of their riches back to the shareholders.
Dividend or Share Buyback?
The precedent has already been set by U.S. mining giant Freeport-McMoRan Copper & Gold Inc., which recently ramped up its dividend by 67 per cent, paid a $1-a-share special dividend and split its stock 2-for-1, while authorizing a $500-million buyback of preferred stock. And there may be more to come.
"We believe the company is well-positioned to continue to pay special dividends and management may look to buy back shares over the near term," said Dahlman Rose & Co. analyst Anthony Rizzuto in a recent research report.
Some analysts think buyback programs may be the vehicle of choice for BHP and Rio Tinto over the next year. Buybacks would serve to lift the stock price by creating demand and reducing the number of shares outstanding. Deutsche Bank analyst Paul Young believes both companies will unveil $5-billion buyback programs when they announce their earnings. (Rio Tinto is scheduled to release its financial results Thursday, while BHP's numbers are slated for release next Tuesday.)
"We believe management will look to authorize buyback programs to manage excess cash generation," wrote analyst Andrew Keen of HSBC in a recent report.
He predicted that unless it embarks on "a major acquisition," BHP could buy back $8-billion of shares in 2011 and $10-billion in 2012 – in addition to more than $15-billion of capital expenditures – just to keep from running a cash surplus. He expects Rio Tinto will also need a buyback program, to manage a cash surplus in the range of $9-billion by the end of 2011.
Any moves to give cash back to shareholders probably wouldn't preclude the pursuit of substantial acquisitions. BHP, in particular, may still be hungry for a takeover after failed attempts to land both Rio Tinto and Potash Corp. of Saskatchewan in the past couple of years.
"We think a possible large acquisition in the energy space could conceivably be one of the few areas in which the company would not likely meet antitrust issues," Mr. Rizzuto said.