The broader implications
There is no doubt that mining companies have had a particularly torrid time of late, and as IG Group’s David Madden pointed out in a note this afternoon, not only did none of the major miners escape the bloodletting on Monday, but more broadly the mining industry is on shaky ground with investors and “it will be a long time before confidence is restored”.
The problem for UK investors is that, as Madden points out: “In years gone by the mining sector provided a rock solid foundation for the London equity market, but now it’s like an anchor.”
And, it is an anchor for a ship that seems to slowly be sinking.
In a note out on Monday on dividend cover ratios, the Share Centre showed the basic materials sector as one of only three sectors to report an increase in dividend cover in the past twelve months.
But, it pointed out: the improvement to dividend cover ratios for mining companies was mainly the result of the non-recurrence of major asset write-downs that boosted the annual comparison.
Helal Miah, research investment analyst from The Share Centre, added: “Shareholders keep up the pressure on managers to sustain annual payouts, even in the face of falling profits. With balance sheets flush with cash for the most part, companies will allow dividend cover to fall until it reaches breaking point, particularly if profits are hit by accounting factors such as asset write downs. Eventually, if they don’t anticipate a rapid bounce back in the bottom line, they throw in the towel and cut the dividends. Glencore is a recent case in point.”
Miah added: “For the UK’s listed companies as a whole, we believe balance sheets are strong enough to allow dividends to continue to grow, even if profitability takes time to recover, but high profile dividend cuts at some of Britain’s famous corporate names demonstrate that investors cannot take dividend growth at individual companies for granted.”
Indeed, Hawksmoor Investment Management’s head of investment, Jim Wood Smith, went so far as to say in a note out this morning that global equity has passed an inflexion point.
“For the moment, let us not argue about the causes. But global equity, led by Wall Street, is giving clear and classic signals that the post March 2009 bull market has run its course.”
And, while he does hasten to add that the end of a bull market does not necessitate everything going terribly wrong, indeed, he sees that as extremely unlikely, index levels are likely to move lower, and, if Hillcoat’s data is correct then mining is likely to remain one of the main drags.
