BHP vs RIO: natural resources dividend pick

[chang]

I've had a position in RIO.L for about six months. I'd like to invest some additional money into a foreign, undervalued, high dividend payer. I'm considering between adding more RIO.L (P/E 8.73; Yield 7.81%) or opening a position in BHP.L (P/E 8.78; Yield 9.17%).

I'm attaching the Fidelity analysis snapshots below. More details on their website. Note that their parameters can change quickly.

richardsok and uncleharley I always appreciate your stock performance analysis. All opinions and experiences welcome. TIA.

(Click to expand.)

[richardsok]

Jun 20, 2023 12:47:50 GMT chang said:

I've had a position in RIO.L for about six months. I'd like to invest some additional money into a foreign, undervalued, high dividend payer. I'm considering between adding more RIO.L (P/E 8.73; Yield 7.81%) or opening a position in BHP.L (P/E 8.78; Yield 9.17%).

I'm attaching the Fidelity analysis snapshots below. More details on their website. Note that their parameters can change quickly.

richardsok and uncleharley I always appreciate your stock performance analysis. All opinions and experiences welcome. TIA.

(Click to expand.)

View Attachment

BHP  TipRanks score 9/10.  Recent GoldSachs upgrade, Mer Lynch reiterates Buy.  Revenue rising and earnings have exceeded projections.  True buying oppty was last summer.  MerLyn target:  $72

RIO.  TipR  9/10.  Recent upgrades to BUY from MorganStan and DeutcheBank.  MLynch target: $90  2022Rev & Inc dropped somewhat from 2021.  Recent earnings have been about in line with projections.

From a technicals perspective, BHP is a bit too volatile for my taste, so RIO is more comfortable to own.  Both companies have recently slipped from very solid bullish signals.

My take:  with today's market weakness, you might have a little buying oppty right here.   Interesting that over the weekend I was looking at BCIM (non-K1 industrial metals ETF).  I don't see anything negative about either RIO or BHP.  Looks like a possible win/win.  With RIO's oversize dividend and lower volatility, you can be relatively indifferent to price movements -- just wait out any hiccup, should one occur -- or trade it on the MACD two-line indicator.  But my mature side still gives the edge to BHP -- opinion only.


(And BTW, chang, what I do can't be described as "analysis".  Nothing so dignified.  I just poke around for numbers and look for data differentials that seem meaningful.)

[uncleharley]

I can confirm what M'Lord stated in the post above and add that according to my accumulation/distribution/OBV tool on stockcharts, RIO is currently being accumulated and appears to be a buy today. BHP needs some work before it is a technical candidate for capital gains. Do you want to sacrifice some safety and capital gains for a larger dividend or vice versa. I have no idea which dividend is the most secure.

[chang]

Thanks richardsok . The ISS-EVA analyst reports are here (need to log into Fido first):

research2.fidelity.com/fidelity/research/reports/pdf/getReport.asp?feedID=1239&docTag=RIO&versionTag=20230620
research2.fidelity.com/fidelity/research/reports/pdf/getReport.asp?feedID=1239&docTag=BHP&versionTag=20230620

ISS-EVA has the highest accuracy scores among analyst firms, hence I pay attention. They rate RIO a "BUY"; BHP one notch lower at "OVERWEIGHT". 

Interesting, they show RIO has a higher volatility rating (86 to 81). BHP actually wins on profitability, trend, volatility, and vulnerability.

BUT RIO kills BHP on the valuation measures. I guess RIO is more the value stock, and BHP is more the profit-momentum stock. (And yet BHP has the higher yield....)

[richardsok]

Neglected to mention I already own a wee little toe-hold position in RIO.  Will be adding a bit more on today's dip.

[richardsok]

A follow-up. I see 13% yield reported for RIO but in the past year there seems only two dividends for a total of $4.90 for 7.8% or so. Something's not kosher.

[Capital]

Jun 20, 2023 19:11:02 GMT richardsok said:

A follow-up. I see 13% yield reported for RIO but in the past year there seems only two dividends for a total of $4.90 for 7.8% or so. Something's not kosher.

I just took a peek myself. Looks like they are including the last 3 semiannual dividends in the calculation in error.

Q1-2023 = $2.25
Q3-2022 = $2.67
Q1-2022 = $4.17

Total $9.09 - I am seeing this in the 13% calculations.

Fidelity is quoting an estimated future dividend rate of 7.28%

[anitya]

chang,

As you might suspect, for me, profitability momentum over valuation. But other factors such as over / under diversification, clutter, tax handcuffs, etc. might become tie breakers.

[liftlock]

Jun 20, 2023 15:49:07 GMT chang said:

Thanks richardsok . The ISS-EVA analyst reports are here (need to log into Fido first):

research2.fidelity.com/fidelity/research/reports/pdf/getReport.asp?feedID=1239&docTag=RIO&versionTag=20230620
research2.fidelity.com/fidelity/research/reports/pdf/getReport.asp?feedID=1239&docTag=BHP&versionTag=20230620

ISS-EVA has the highest accuracy scores among analyst firms, hence I pay attention. They rate RIO a "BUY"; BHP one notch lower at "OVERWEIGHT". 

Interesting, they show RIO has a higher volatility rating (86 to 81). BHP actually wins on profitability, trend, volatility, and vulnerability.

BUT RIO kills BHP on the valuation measures. I guess RIO is more the value stock, and BHP is more the profit-momentum stock. (And yet BHP has the higher yield....)

Both stocks have buy ratings at Validea. BHP scores 98 out of 100, versus 91 for RIO.  RIO has a slightly better valuation score of 87, versus 80 for BHP.   Both stocks have strong fundamental momentum scores of 97 for BHP versus 93 for RIO.  Price Momentum is not strong for either stock with RIO at 44 and BHP at 51.  BHP has much better long term growth:  LT EPS Growth: BHP = 29.6%,  RIO = 8.2%  LT Sales Growth: BHP = 12.4%, RIO = 7.9%.  

I own RIO but BHP may be better choice.

[chang]

Both stocks drifted downward since my OP. I plan to make a RIO buy tomorrow when the London market opens. Sentiment on RIO vs. BHP seems fairly split, here and elsewhere; and maybe it doesn't much matter. But as I own RIO, and I'm looking at an incremental buy, I'll do that. Should we see a major upheaval in the future and fire-sale prices, I'll consider BHP.

[bb2]

Thanks for the post and question; curious about mining, just for fun but not real enthusiastic here because commodities are so far above my pay grade and if I do buy, it's at a serious low, historically.

I've only started looking at RIO.......
RIO sales estimates for the year are for lower, slightly. FWIW.

From the last call:

Capital Allocation priorities: 1. Essential capital (Keeping the ship running) 2. Ordinary divs 3. Special divs (Typical stuff)

Looks like one shouldn't expect much in the way of special divs in 2023 - "Now it's worth looking at our third priority for capital allocation in more depth. Over the past few years, we've supplemented the ordinary dividend with specials given our strong earnings and cash flows. We're now seeing a modest shift towards compelling growth as we unlock opportunities with $5.3 billion allocated in 2022, including our first forays into M&A for over a decade. "

RIO paid specials in 2019, 21 and 22 but it wasn't a game changer - you can look up the history. RIO gets poor div grades for consistency and growth.

"Looking ahead, there is much uncertainty with high inflation and tight monetary policy carried into 2023 and the global economy expected to slow down further. Nevertheless, there are some green shoots. Commodity prices have found support in recent months with global base metal inventories at low levels and China policy pivoting to pro-growth. This could provide some support, especially in infrastructure and real estate. Cost pressures should ease over time with lower energy prices flowing through. However, we should expect further volatility with constraints for skilled labor and increases still to come in contracted costs, which are often lagged to an index."

RIO just announced a spend of $1B on Kennecott copper mine. Stock took a 2% hit today.
www.sltrib.com/news/environment/2023/06/28/rio-tinto-invests-nearly-1-billion/


I like the battery efforts from RIO. Very small investments.

June 2022
www.mining-technology.com/news/rio-tinto-invests-in-nano/
"The Anglo-Australian miner has also invested $10m (C$12.5m) in Nano One for a stake of nearly 4.9% in the company.

The transaction will see Nano One issuing 4.6 million shares at C$2.70 apiece in a non-brokered private placement.

Nano One will use the proceeds to acquire the Candiac facility in Québec, Canada, along with its conversion to One-Pot lithium iron phosphate (LFP) and industrial-scale piloting of other CAM solutions.

The firm will also utilise the investment for working capital purposes, commercialisation, technology and supply chain development."



May 18,2023
www.afr.com/companies/energy/rio-tinto-signs-6m-deal-with-brisbane-battery-developer-20230518-p5d9bl

"GMG will retain ownership of the intellectual property of the graphene aluminium-ion battery pouch cell and battery pack. On completion of the joint project, Rio Tinto would have the right to procure and use the batteries in their operations.

The deal does not stop GMG selling the technology to other mining companies, but Rio Tinto will receive a financial payment for helping back the technology."



June 27,2023
www.reuters.com/markets/commodities/rio-tinto-sets-up-battery-testing-plant-melbourne-2023-06-27/

""I have just spent some time at Bundoora, where we are constructing an end-to-end battery laboratory to improve our understanding of battery production, manufacturing and chemistry," said Sinead Kaufman, chief executive of its minerals division.

"At this lab we will build our own batteries, allowing us to test how our minerals and other products will perform in real-world applications, such as in an electric vehicle batteries," she told a mining conference."

[anitya]

bb2 ,

Thanks for sharing. I am not worried about the loss of Special dividends if they want to conserve cash for M&A. I think the 7% div both Chang and Richard have considered in investing does not include the Special div.

I am invested in RIO for the battery efforts + their regular operations. I rolled my investment (+ profits) from ALB (the bigger batter play) into RIO.

I have not educated myself about the battery chemistry but thought lithium Ion is the thing (may be Musk influenced my thinking). It may be a small investment but if that technology is not the future, but I look at all actions of management for their focus and execution. Aluminium-Ion has more advantages than Lithium-Ion but AI is still in development stage whereas LI is a more mature technology and commercially viable.  I am not a member of the Musk fan club but the guy does not waste time and executes well.

The challenges of Aluminium-Ion battery becoming commercially viable: development of a stable and efficient electrolyte; development of a cathode that can accommodate the large number of aluminum ions; optimization of the cell structure, etc.

I can not afford to invest in poor management and / or poor ROI industries.  Let me know if you think RIO management are soft (i.e., not good at execution).

[bb2]

Well, need more work on RIO but got sidetracked to the whole commodity cycle thing, which is more how I'd decide to invest in any commodity play. So much to know about this stuff. VALE just got a downgrade due to the China outlook for steel. Also, China is moving to more scrap metal instead of ore so the ore thing will suffer a bit for that reason. I wonder if the EV trend, India growth and Ukraine rebuiding are enough for metals to rally. Supply side is another matter and I don't know anything about it. People spend their lives with this stuff and I'll never have a clue, which is why I'd tend to just look at a long term chart and buy when things are dirt cheap. RIO doesn't look dirt cheap.

[anitya]

bb2, Thanks

[bb2]

Today's news - Morgan Stanley seems to like China's prospects.... If China does enact stimulus, which probably is likely, RIO and others will rise. Seems shorter term though Buy RIO for a trade? Take the pop and get out?

Morgan Stanley shakes up its global dividend portfolio....

"We are adding a position in Rio Tinto for three reasons: 1) China’s high likelihood of announcing a stimulus should support commodity demand; 2) RIO has a best-in-class balance sheet and underappreciated earnings power; and 3) RIO trades at an attractive valuation, offering a current spot free-cash-flow yield of 9%," strategist Kevin Demers wrote in a note.

This is a pretty good summary, from a recent analyst post on SA:

"RIO's stock prices have moderated in line with the iron ore spot prices since the commodity comprises a large part of its EBITDA thus far.
For now, the long-term contracts suggest a new normal in iron ore prices through 2024, potentially lifting its top and bottom line, with China's import YTD looking promising as well.
However, China's commitment to expand steel scrap usage may potentially erode the long-term demand for the commodity.
Then again, RIO is also diversifying into copper and lithium carbonate production, capitalizing on the global electrification trend through 2050.
In any case, the commodity market's cyclical nature and the stock's semi-annual variable dividends may not suit all income investors."

Analyst's bio: Long-Term Horizon, Growth, Deep Value
I am a full-time analyst interested in a wide range of stocks. With my unique insights and knowledge, I hope to provide other investors with a contrasting view of my portfolio, given my particular background.

Prior to Seeking Alpha, I worked as a professionally trained architect in a private architecture practice, with a focus on public and healthcare projects. My qualifications include:

- Qualified Person with the Board of Architects, Singapore.

- Master's in Architecture from the National University of Singapore.

- Bachelor in Arts from the National University of Singapore.