Can the miners dig the FTSE 100 out of its dividend hole?

A 55% hike in BHP’s first-half dividend and the restoration of payments to shareholders at Glencore are putting welcome cash back into the kitty for investors in the UK stock market. The miners’ dividends will help to fill the large hole left by BP and Shell in particular and increases from the diggers underpin consensus forecasts for an increase in total FTSE 100 dividends for 2021 of one sixth.

With Rio Tinto also expected to unveil a healthy increase in its full-year dividend for 2020, the miners look set to become the largest contributing industrial sector to the FTSE 100’s overall pay-out in 2021, according to analysts’ forecasts.

Anglo American, Antofagasta, BHP, Evraz, Fresnillo, Glencore, Polymetal and Rio Tinto are now expected to pay dividends worth £13.5 billion in calendar 2021. That is a record high for the sector and represents 18% of the FTSE 100’s forecast £74 billion total, the highest percentage contribution to the index’s overall pay-out from the mining sector.

Source: Company accounts, Marketscreener, analysts' consensus forecast

As metal prices stay firm, capital investment plans are kept disciplined and mega-mergers seem off the menu, the miners continue to generate cash and keep their debts firmly under control (Rio Tinto is even forecast to have a net cash balance sheet in 2022). This provides plenty of scope for generous dividends and as Government bond yields creep higher, central banks keep ladling out monetary stimulus and Governments continue to pile on fiscal stimulus markets are wondering whether the next big story is the return of inflation. If so, miners could be a good place to be, as during inflationary periods – when paper money effectively loses a chunk of is purchasing power – then ‘real’ assets such as commodities are often seen by investors are some form of protection against this.

Source: Refinitiv data

It may therefore be no coincidence that Mining is the second-best performing sector, in capital terms, so far in 2021, with Industrial Mining and Metals not far behind in third. (Even the widely-reviled Oil & Gas Producers sector ranks fifth). Nor is this a flash in the pan – over the past 12 months, Industrial Metals ranks top and Mining ranks fourth. Central banks continue to fret over the lack of growth and inflation, while financial markets are preparing for a strong recovery and the return of inflation, possibly in the view that the Fed, ECB, Bank of England, Bank of Japan and others are in danger of overdoing it with the monetary medicine.

Capital gain:

Source: Refinitiv data

If that view is borne out then it could help the FTSE 100 back in from the cold, after years of underperformance, as it is so heavily weighted toward miners and oils. Between them they provide a fifth of the index’s market capitalisation and are forecast to provide 31% of total profits and 28% of aggregate dividends in 2021.

The danger is that the global economy double-dips, as the virus refuses to go away, debt proves too onerous and corporate and consumer confidence slips away. Neither commodity prices nor mining and oil stocks are likely to thrive in such an environment.

But as central banks seem determined to let the global economy run as hot as they dare, the combination of a successful vaccination programme, bumper fiscal stimulus and ongoing monetary accommodation could prove fertile ground for commodity plays.

If so, a rebound in their profits, cash flows and dividends could give greater credence to forecasts of a 3.9% dividend yield from the FTSE 100 in 2021. Supported by forecasts of higher dividends from the miners, the index’s total payment is now expected to reach £74 billion in 2021, only a fraction below 2019’s payout of £74.7 billion, with the prospect of more to come in 2022 if the global economy really does gain traction.

Source: Company accounts, Sharecast, Marketscreener, consensus analysts' forecasts

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