Following a number of years of below par returns, there was a lot of hype surrounding BHP Billiton Limited (ASX: BHP) going into 2014 with many analysts forecasting it to be one of the year’s better performing stocks.
While the nation’s largest banks and other blue-chip stocks like Telstra Corporation Ltd (ASX: TLS) soared in 2013 as investors sought out the highest yielding plays, it had been anticipated that it would be BHP and its mining peers that would drive the local bourse in 2014. They certainly entered the year with plenty of momentum, having climbed strongly in the second half of last year.
However, after two months the returns haven’t been quite as good as what the market hoped for. While BHP has just managed to match the S&P/ASX 200 Index’s (Index: ^AXJO) (ASX: XJO) 1% return since the beginning of the year, Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) have actually declined by 2% and 6.5% respectively. In fact, Fortescue was marginally ahead of the index before it plummeted 9.6% last week alone.
So what should you expect from the sector for the remainder of the year? Are the nation’s largest miners still a good bet for new investments?
Personally, I am not so bullish on iron ore. The commodity’s price has slipped more than 10% since the beginning of the year, falling from over US$130 a tonne to below US$120 a tonne today. The miners continue to ramp up their production levels and I do not expect demand growth to remain as strong in the medium-to-long-terms, suggesting the price will fall even lower. Although the miners are heavily focused on reducing costs and improving productivity, their margins will definitely be impacted by the falling price.
For me, that puts Fortescue and Rio Tinto out of the question given their heavy reliance on the steelmaking ingredient.
I am however still attracted to the “Big Australian”. While iron ore is its primary generator of revenue, its operations are far more diversified given its four pillar strategy, whereby heavy investments are also made in its copper, coal and petroleum divisions. It is also investing in potash (a key fertiliser ingredient), which I believe will attract far greater demand in the future as the global population grows.
What’s more, BHP maintains an attractive fully franked 3% dividend yield. Although it might not be as great a yield as offered by the banks, there is still plenty of room for the stock to run compared to the banks which I think are overpriced. In addition, it is expected that the miner will increase its returns to shareholders by the year’s end in the form of a share buyback.
The miners’ share performances are highly leveraged to the price of the commodities they mine. I would feel much more comfortable holding shares in BHP rather than relying on the long-term strength of a commodity to bolster my investment.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.
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