2014 could be the year of the dividend-paying resource companies. Just as 2013 was characterised by the big four banks, Telstra (ASX: TLS) and the big retailers outperforming the market based on their strong dividend yields, 2014 could see income-seeking investors take up positions in Australia's big energy and resources stocks.
Forecast yields on the big winners in 2013 range from around 5% for the banks and Telstra, to a little over 6% for the more volatile retailers. After big gains in 2013, market commentators note that these high-yielding stocks could be set for a fall if interest rates start to rise across the globe.
2013 underperformance
Conversely, energy and resource companies had a subdued 2013 and generally underperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) benchmark index. Traditionally Australia's big resources companies have spent the majority of earnings on capital expenditure to boost production by developing new mines and upgrading infrastructure, however this is set to change.
A change in focus
Poor productivity, forecast falls in resource prices and high labour costs in Australia has seen capital expenditure budgets cut by the big resource companies in order to boost return on equity and capital.
This has resulted in Australia's major resources companies generating excess cashflow that appears likely to be returned to shareholders via increased dividends or share buybacks.
BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Woodside Petroleum (ASX: WPL) have all announced severe reductions in capital expenditure and flagged an increase in dividend payout ratios in coming years.
Woodside Petroleum was the first out of the blocks in 2013, announcing a special dividend early in the year that pushed its 2013 full-year yield to around 6%. Woodside's payout ratio has increased from around 50% to close to 80% of earnings. At the current price, brokers are expecting a similar yield in 2014.
BHP's share price is currently at the same price as it was in early 2012. Since that time, earnings-per-share have dropped from 311 cents to 240 cents (2014 forecast), however the dividend payout has risen 10% from 108 cents to 120 cents. BHP's forecast yield for 2014 is a less impressive 3.3%, however with a payout ratio of 52% there is room for special dividends or buybacks if management view the share price as undervaluing the company.
Rio Tinto is the least likely of the three companies to surprise with a massive dividend payout. For some years now, the company has adopted a 'progressive dividend policy,' which aims to smooth the returns between cyclical earnings peaks and troughs by ensuring the dividend magnitude can consistently increase. This makes it less likely that the group will increase its payout ratio meaningfully. The payout ratio is forecast to increase from 36% to 40% from 2013 to 2014 as the dividend yield increases from 2.6% to 2.9%.
Higher risk
Fortescue Metals Group (ASX: FMG) is a higher-risk big resources company that could surprise on the dividend upside. Fortescue had a flawless 2013, exceeding expectations to pay down its huge debt load and refinance remaining debt at a lower interest rate. In the 2013/14 financial-year, Fortescue is forecast to deliver over 20 cents in dividends, corresponding to a yield of around 3.5% on a payout ratio of 23%. If the company can have an equally impressive 2014 and 2015 it could become a great, long-term dividend payer for shareholders.
Foolish takeaway
Traditional, defensive and high-yielding companies are not the only way for investors to generate a sustainable income stream. Higher growth sectors, including energy and materials, contain high-quality companies that can deliver sustainable returns for shareholders though periods of cyclically high and low returns. Australia's big names in energy and resources have wisely cut back capital expenditure and look set to return a higher proportion of earnings to shareholders in years to come.
