Or a contrarian idea for you. Now it cannot have escaped your attention that commodity prices have been under pressure for a while now with the oil price halving last year for example. This has also been the case for industrial commodities like copper, iron ore and also gold too. The net effect of this has been pretty disastrous for the oil & gas and metals and mining sectors.
Indeed we saw further falls in the mining sector yesterday, along with the rest of the market as it happens, but this took the sector down to lows last seen at the depths of the crisis in 2009. This has stirred some contrarian interest on my part, so I thought I would do some digging of my own and share with you what I have dug up.
Here is a ten year chart for BHP Billiton (BLT) which is something of a bell weather for the broader mining sector given its diversified nature, although they have focussed a bit more recently with the disposal of some non core assets via the demerger of South 32. As you can see it is not quite back to its lows of 2009, probably reflecting the slightly better quality of their operations versus the sector overall.
In terms of its rating it currently stands on nearly 20x for the year to June 2016 with a big decline (more than halving) of earnings already baked into the forecasts. Despite this the dividend is forecast to be up by 5% this year before being flat may be in 2016 despite cover collapsing to less than 1x next year. Thus there could be a risk of a dividend cut which the 7% or so yield is starting to factor in, although their dividend policy form the report and accounts is as follows. "We have a progressive dividend policy that seeks to steadily increase or at least to maintain the dividend in US dollars at each half-yearly payment." I note they did maintain their dividend during the last downturn in 2009, although they had much greater levels of cover as mining was still in the midst of its so called super cycle back then.
Talking of which I read an interesting article the other day which suggested that the mining sector or rather demand for industrial commodities is really reflecting the reality of underlying economies, demand and supply balances and deflationary pressures. Whereas financial markets are in their own super cycle these days being boosted by liquidity from central banks and resultant demand for financial assets. Thus ironically the miners might be better able to withstand a withdrawal of central bank liquidity and rising interest rates than other sectors as that might then indicate a more sustainable pattern of growth in the world which could be good for commodities.
Any way I digress lets get back to digging for value and yield. An alternative to BHP Billiton would be Rio Tinto (RIO) another diversified mining group. They actually look better value on around 16x this years earnings although their yield is lower at 5.6% to 5.8% as their cover is expected to remain above one and there may therefore be less risk of a dividend cut. Failing that if you are a gold bug and wanted to get really speculative you could always check out a Zimbabwean Gold miner - Caledonia Mining (CMCL) which has reported first half results today, although the recent fall in gold price makes that one less attractive now.
But as Status Quo sang - Is there a better way? Well regular readers will know I am a keen on investment trusts (as well as music) and there are a few ways you can play the sector via these. One I would highlight is the biggest most liquid play in the sector - BlackRock World Mining (BRWM) which has a market cap. of over £400m and stands at a discount of around 7% or so to its estimated Net Asset Value. So not only can you pick up a diversified portfolio of miners (if you want to) at a discount (including 10% or so in both BLT & RIO) but you also get a yield of 8.5% based on the current 21p dividend and a 245p share price.
Now that dividend is not cast in stone as the dividend from this one has been quite variable over the years (see page 7 of the report and accounts) and they did last cut it by nearly 14% back in 2009. in recent years they have introduced more of a focus on delivering a yield, although this did mean they messed up a bit by getting too heavily into some royalty schemes which didn't work out so well. Putting that to one side though the other attractive feature is the fact that they have revenue reserves (which can be used to pay and smooth dividends) equivalent to about 140% of the cost of the dividend. So if the manager and the board do their job then barring a complete collapse in mining dividend generally then they should at least be able to maintain or only slightly cut the dividend again.
Summary & Conclusion
So in summary the attraction here is that you can get a professionally managed and diversified portfolio of miners at a discount, plus a bit of gearing (12.5%) and with a yield that is greater than some of their main holdings and arguably better covered given the revenue reserves. Quite useful if you don't have the desire or inclination to get your head around metal prices and commodity cycles, but would like some longer term exposure as part of a diversified portfolio. If you did - then this seems like a good way to get it. The other reason to think about it now is on a contrarian basis as the sector has done so badly for the last six years or so and the yields available seem to indicate some value. However, as ever with investing no guarantees that it won't get worse and that the dividends and share prices could go down as well as up etc. but certainly one to put on the watch list. Personally as I was in need of some losses to offset against some of my gains I sold my BHP Billiton and stuck the proceeds into this for the reasons stated above.
Any way if that has whetted you appetite you can check out their site at the link in the name of the trust above where you'll also find a copy of their annual report and fact sheets etc. If not (did I mention I like music?) as a reward for getting this far, I'll leave you with some music, which hopefully you'll enjoy, as it is a fine album appropriately called After The Gold Rush by good old Neil Young.
...as it has been a busy day for results today. Most of these I have covered recently when they announced year end trading updates so I'll just give brief comments today.
Firstly was Provident Financial (PFG) - the home credit and sub prime credit and instalment lender (click the name for previous posts or see the categories list at the side of the blog). They reported results which were probably just shy of best expectations with the dividend at 98 pence rather than 99 pence forecast, but then it was up by 15.3% which was better than expected at the start of the year. Thus not surprised to see the shares off a little first thing as they have had a great run and only look about average value albeit with a decent and strongly growing yield of around 4% which remains the main attraction of this one. The only real point of note is that I see they are scrapping their Polish Credit card pilot at little cost this year having seen start up losses of £10m there last year - so a small boost there.
Next onto boxes and firstly the cardboard variety as manufactured by Mondi (MNDI) amongst other things. In contrast to PFG their numbers seemed to be slightly ahead of expectations at the earnings level and as such the share have responded positively first thing. I note the dividend was perhaps 1c light of forecasts but was nevertheless up by 17% and well covered by earnings and cash flow. This one is obviously sensitive to general economic conditions (cyclical) and they say that the outlook for this to remain below average. They are also affected by exchange rate moves but these have tended to help them recently. They summed up by saying "Furthermore, the recently completed capital investments and ongoing projects should contribute meaningfully to our performance going forward. As such, we are confident of making further progress in the year ahead." The only other point I noted was that they flagged a little extra cost from planned outages this year which are expected to total €80m versus €55m last year. The shares have done well in the last year out performing by around 20% and they have re-rated somewhat as a result. Thus they look less compelling on around 15 to 16x next years earnings with a 2.7% yield, before any changes on the back of these numbers. The latest declared operating margin also leaves it on a fairish 7% earnings yield. Consequently the CI score has drifted back into the 60's as the shares have re-rated and as such they look like a hold up here and if you hold them I would suggest you need to keep an eye on economic developements for signs of weakness / recession emerging given their cyclicality.
Persimmon (PSN) was the other box provider that reported today and as expected reported very strong results and a welcome early payment (April rather than July) of this years planned return of capital of 95 pence. The problem here is that the share had travelled well before today's numbers so probably not surprising to see some profit taking as perhaps people think this might be as good as it gets perhaps. They are however committed to further capital returns over the next few years, although next years is only currently expected to be 10 pence, although this could be upgraded.
So with a fullish looking (for a house builder) PE of nearly 12x this years earnings and more limited yield support given the lower return of capital planned for next year I can see whey people would be taking profit up here ahead of the General Election uncertainty. Despite this the company say the year has started well and they still seem well place to prosper in the medium term so as I always say you pay your money and take your choice.
Finally digging deep into my reserves of endurance and as the coffee pot beckons just a quick mention for BHP Billiton (BLT) which reported half year results today. Not being a mining analyst I'll not get into analysing or debating the various possibilities for commodity prices. But in passing I note that they still expect an average investment return of greater than 20% for their portfolio of high-quality development options. In addition they say they expect to maintain or not "re-based" as corporates like to say these days, the dividend even after the planned demerger. This suggests that the 5%+ yield is safe for now but I note that earnings have been downgraded steadily in recent months and the cover is diminishing and will diminish further post the demerger. So if economies and commodity prices continue to struggle then this dividend could come under pressure in the medium term.
I wrote recently about a service called Quant Investing and their Screener service which has introduced a way of screening for low liquidity stocks which I have written about in the past. Well a quick update for you as I have got around to trying it out and one of the first things I decided to do was to run their version of a low liquidity screen which you can read about here.
In essence it screens for companies by defining liquidity as "adjusted profits to yearly trading value and not as the number of yearly shares traded divided by the company’s total shares outstanding." Thus qualifiers therefore have a low level of turnover (value of annual volume traded in shares) in relation to their profitability. I screened for the top 20% in the UK which gave a list of just over 100 names.
The list does include some recent issues like AA and Shoe Zone so probably short history factor there. It also includes quite a few AIM stocks which I guess is perhaps not a surprise. Of the AIM names some of the quality names that I like such as James Halstead (JHD) and Nichols (NICL) are included. Interestingly for me it also includes a few other stocks l have written up like Computacenter (CCC) and PZ Cuzzons (PZC) and two of the more recent ones like Hill & Smith (HILS) and Connect Group (CNCT).
Otherwise the biggest surprise for me was to find BHP Billiton (BLT) on the list. Trying to rationalise it I guess investors have lost interest in miners recently, hence low turnover in the shares and they probably still have historically high profitability. That may however be under pressure going forward and it has certainly seen some down grades recently on the back of weaker commodity prices. However, as it is coming up on some of my other screens and it offers a reasonably well covered near 5% yield, it might be worth a look on a contrarian basis as a three year under performer.
Food for thought and other than that it is a list that might provide the basis for some further research as just because a stock is on this list doesn't mean it will necessarily outperform. However the research suggests that stocks as a whole with this type of characteristic have tended to outperform.
If it is of interest you can access the full list in the file below, cheers.