South32 Ltd shares go gangbusters on dividend talk

Shares in metals and coal mining business South32 Ltd (ASX: S32) have jumped 5.4% to $1.91 this afternoon as stronger coal and commodity prices combine to improve the group’s outlook.

The Australian Financial Review is also reporting a Credit Suisse research note that suggests the company is likely to pay out dividends to investors in lieu of a lack of suitable other capital investment opportunities. South32 shares have more than doubled in value over the last six months as the company and its free cash flow prospects recover from the commodity bust that consumed markets at the start of 2016.

South32 is not alone in enjoying a surging share price among the commodity giants with the likes of BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and Woodside Petroleum Limited (ASX: WPL) all performing strongly on evidence the commodity price cycle bottomed out in the first quarter of 2016.

South32 shareholders will welcome the news of a potential capital return as the stock has generally headed south ever since it was spun out of BHP Billiton just over a year ago. Much of the recent price strength has also been shared by its coal mining rival Whitehaven Coal Ltd (ASX: WHC), which has also more than doubled in price over the course of 2016.

Coal remains a key export for Australia and over the short-term prices could continue to rise after an extended period of depressed prices prevented much in the way of new supply being brought online. The supply and demand dynamic is now translating into higher prices, although over the medium term more supply may see prices head south again. Moreover, the environmental concerns over the use of coal mean it’s unlikely to be a good long-term bet.

Investors then may be better off taking some profits on South32 and looking to businesses that offer superior long-term growth prospects and sustainable dividends.

I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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