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BHP, Rio to focus on shareholder returns

As resource-based companies divert their attention away from capital spending over the coming years, investors can expect a greater focus on shareholder returns and greater productivity.

Speaking at an industry conference earlier this week, BHP Billiton’s (ASX: BHP) new CEO Andrew Mackenzie confirmed the company’s intentions to cut spending back from a peak of more than $22 billion to $18 billion by the end of next fiscal year, and focus on returning to shareholders and increasing productivity levels on current projects. Sam Walsh, the CEO of BHP’s primary competitor Rio Tinto (ASX: RIO), has also pledged to cut over $5 billion in costs by the end of 2014.

The resources sector has significantly lagged behind the rest of the market this year, having lost 8.5% compared to the 11.7% gain on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). A number of resource companies have faced harsh criticism from shareholders due to their increasingly higher capital expenditure on resources, despite falling prices and the high Australian dollar deterring overseas customers.

Under new management this year, selling off underperforming assets and redirecting attention towards successful projects has been a refreshed focus for both Rio and BHP, with Mackenzie suggesting that each of his company’s divisions “must stand alone” and “vie against other operations for future investment.”

Mackenzie added: “If a project, geography or commodity doesn’t offer the right returns, we will redirect our capital elsewhere or we simply won’t invest. That will obviously create an opportunity to have more capital returned to shareholders, and that is the balance that I’m very concerned to get right”.

Nader Naeimi, portfolio manager at AMP Capital, owned by AMP  (ASX: AMP), stated that whilst it is still important that investments are made, there is also a lot of cash on the balance sheets of resource companies, and returning some of it to investors would be welcomed.

Yesterday, the S&P/ASX 200 fell by 29.3 points, led by BHP and Rio, which lost 1.85% and 3.09% respectively. Fortescue Metals Group (ASX: FMG) also fell 4.01% to finish the day trading at $3.59.

Foolish takeaway

Looking at the S&P/ASX 20 (ASX: XTL), BHP and Rio remain the cheapest in terms of value. As the financial and retail sectors have increased, the dividend yields on offer have decreased, whilst low mineral prices have caused the resources sector to plunge. With a current yield of 3.1% for Rio and 3.4% for BHP (which both look likely to increase), these companies are starting to look more attractive to add to your portfolio.

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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