The deepening of the sovereign debt and financial crises in Europe and the early signs of an economic slowdown in China are threatening global economic expansion. While the European economy has already entered recessionary territory, there are worrying signals that demand in the robustly-growing emerging markets and the United States could succumb to the strong headwinds. Industrial production is still expanding; however, demand for industrial commodities is softening.
In fact, in recently-released statements by BHP Billiton (NYSE:BHP), the diversified miner's management points at a loss of confidence among investors in the "long-term health of the economy," which is causing commodity prices to weaken. Due to a dreary outlook for commodity prices in the medium term, the company is now scrapping its plans to boost capital spending in order to expand production. Prices of industrial metals, such as copper, aluminum, zinc, and nickel, have been on a downtrend since February; iron ore spot prices have also dropped by 10% since late April (see chart below). The latest confirmation of a weak commodity outlook does not bode well for the world's resource miners.
BHP Billiton is a diversified natural resource mining company with operations around the globe. The company has $104 billion in market capitalization and $103 billion in assets. The company sits on $10.3 billion in cash, equivalent to $3.8 a share. BHP Billiton pays an annual dividend equivalent to $2.2 a share, with a dividend yield of 3.36%. The company's payout ratio is at a low 26% of trailing-twelve-month earnings and 42% of free cash flow.
With strong increases in profitability due to booming commodity prices, the miner raised dividends on average by 25% per year over the past decade. The rate of dividend hikes has slowed down to an average of 10.6% per annum over the past three years. The company is forecast to grow its earnings per share (EPS) by nearly 15% per year over the next five years. However, this forecast may be too optimistic, given the dreary outlook for global commodities. The company's stock, which trades at 11.8 times its forward earnings, is down 14.4% from the beginning of May.
Among fund managers, the company is still popular with Ken Fisher of Fisher Asset Management, who holds some 6.13 million shares in the company. Ken Heebner of Capital Growth Management and financier George Soros closed out their positions in the company last year.
Rio Tinto (NYSE:RIO) is a $67 billion multinational company engaged in the exploration, development, and mining of natural resources. The company has $119.5 billion in assets, including $9.7 billion in cash. The company pays an annual dividend of $1.83 a share, which translates into a dividend yield of 3.7%. The company's payout ratio is at a low 39% of earnings and 29% of free cash flow.
This miner has increased dividends at an average rate of close to 15% a year over the past ten years. In the past three years, it has been boosting dividends at an average rate of 29%. Robust dividend growth was posted, despite the company's earnings declines of 11.5% per year on average over the past five years. While analysts expect the company's bottom line to grow more energetically over the next five years, with an average annual rate of growth forecast at close to 17%, these expectations seem exaggerated given the softening commodities demand in the coming period. The stock, which is currently trading at 5.3 times its forward earnings, is down more than 19% from the beginning of May.
Among fund managers, Ken Fisher seems to have confidence in the company's good prospects in the future. He owns some 11.55 million shares in the company. On the other hand, Mario Gabelli, Ken Heebner, and Dan Loeb of Third Point sold out their stakes in the company last year.
Vale S.A. (NYSE:VALE) is a $59 billion Brazil-based resource mining company. It is the world's second-largest miner and one of the largest producers of iron ore, pellets, and nickel. The company has $129 billion in assets, out of which $3.5 billion is in cash. Vale pays an annualized dividend of $1.15 a share, which translates into a yield of 6%. The company's payout ratio is at a low 36% of last year's earnings. The company's dividend has increased some 9.4 times between 2002 and 2012.
The company's performance over the past five years was splendid. The company's earnings per share grew at an average rate of 26.3% per year over the past five years. This year, the company's earnings per share are expected to plunge 16.7% from 2011. The prospects are also grim, given that analysts expect Vale's earnings per share to continue declining at an average annual rate of 0.9% over the next five years. The stock, which is trading with a forward P/E of 5, is down 17% from the beginning of the month.
Despite the forecast dips in earnings, some fund managers remain upbeat about Vale's future prospects. Two of them are the financier Ken Fisher and Joel Greenblatt of Gotham Capital.
Teck Resources (TCK) is a $17 billion Canadian diversified mining and smelting company. The company has $34 billion in assets and $4.4 billion in cash. The miner is paying a dividend with a yield of 2.55%. The company's payout ratio is at a low 17%. Teck Resources' earnings per share are forecast to rise, on average, by 10.9% per year over the next five years. This forecast is based on the assumption that the economy will expand vibrantly, which will bolster resource demand. The robust growth scenario is under threat from the sovereign and financial crises in Europe and a slowdown in China, both of which have dragged down industrial commodity prices. The company's stock, which is trading at 7.3 times its forward earnings, is down 32% from the beginning of the month.
Fund investors are not currently interested in the stock. In fact, Ray Dalio of Bridgewater Associates, Ken Heebner, and Steve Mandel of Lone Pine Capital closed out their positions in the miner last year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.