Redesigning the business 

Rio Tinto (LSE: RIO), is a great example. Over the past five years, this miner has overhauled its business model. Nearly $17bn of disposals have been announced since 2013. Coal assets have been disposed of, and the company has double down on what it knows best: iron ore and aluminium. Production of these two commodities now makes up more than three-quarters of revenue. 

By selling off assets, Rio has been able to pay down most of its balance sheet debt. At the end of 2015, the company reported net debt of nearly $14bn or 1.3 times earnings before interest tax depreciation and amortisation (EBITDA), which was hardly troubling by any standards (a net debt-to-EBITDA ratio of two or more is a red flag), but management wasn’t comfortable returning capital to investors without a fortress balance sheet behind the business. Today, net debt stands at just $5.2bn or 0.3 times EBITDA. 

As well as paying down debt, the company has been returning cash from operations to investors. So far this year, management has announced $5.2bn of share buybacks, and analysts believe another $3.5bn could be paid out to investors when Rio completes the sale of its stake in Indonesia’s Grasberg copper mine next year. 

On top of buybacks, the company has also been paying out record amounts of cash to investors. Analysts believe the business is on track to return a total of 226p to investors via dividends in 2018 giving a dividend yield of 6.4%. The payout is expected to fall slightly next year, although analysts are still forecasting a yield of 6.1%.

Rising payout 

If Rio’s attractive dividend credentials are not enough to win you over then perhaps BHP Billiton‘s (LSE: BHP) prospective 8.6% dividend yield will. 

Just like Rio, over the past few years, BHP has been cutting costs and selling assets, using the cash generated from both of these initiatives to reduce debt. The rest has been returned to investors. 

After slashing its distribution by more than 70% to just $0.29 in 2016, analysts are forecasting a total full-year dividend of $1.65 (129p) per share for BHP’s current financial year. Like its peer, BHP has adopted the strategy of returning all excess cash to investors. Unfortunately, this means that unlike a progressive dividend policy, where management tries to increase the payout every year, dividends will be more volatile because they are linked to earnings. Next year, analysts are expecting a 6% decline in BHP’s earnings per share, which will translate into a 25% reduction in the company’s full-year dividend they believe. Still, even after this reduction, the shares are on track to yield 6.5%.

With high single-digit dividend yields on offer, I think both BHP and Rio are both bargains after recent falls.

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BLT, please

If you look beyond that and invest for the long term, the buy case is strong. Most investors should have exposure to this sector and growth monster BHP Billiton (LSE: BLT) is a good place to start. The stock is up 146% over the past two years, driven by the sector’s spectacular recovery since the January 2016 China meltdown.

BHP gives you exposure to a broad range of natural resources, including iron ore, metallurgical coal and copper, and oil and gas as well. It responded to the traumas of 2015 by slashing capex and cutting overheads, leaving it nicely positioned for the cyclical upswing. So as the oil price nudges $70, it benefits. When the copper price climbs, again, up it goes. When prices fall, it hurts.

Heavy metals

Metal prices have surged over the last year due to the weak dollar and recovering confidence in China, sending copper to a three-year high of $7,000 a metric ton, but they dipped yesterday amid signs of rising stockpiles. With the global economy growing and factory output rising, this may only be a blip.

Size matters in the commodity industry, allowing this vast £86bn group to withstand lower prices, maintain production and watch smaller rivals go to the wall. It generated free cash flow of $12.6bn in the year to 30 June, while reducing debt by 37% to $16bn. Yet it trades on a modest 13.9 times forecast earnings, with a price-to-earnings growth ratio of just 0.7. Current yield is 4.1%, covered 1.7 times. One to buy and hold as long as you possibly can. Here is another mining stock that could help you retire early.

All that glisters

Hochschild Mining (LSE: HOC) is a relative minnow with a market cap of just £1.24bn and is even more volatile. It is up an incredible 500% over two years, mostly due to a strong 2016. It is up only 5% over the past 12 months, with profits undermined by increased costs. Do not expect it to carry on four-bagging.

This morning’s production report for the year ended 31 December saw CEO Ignacio Bustamante reporting that it has “once again delivered a historic year of production with output growing for the fifth consecutive year”.

Silver machine

Total 2017 production was a record 513,598 gold equivalent ounces and 38m silver equivalent ounces, including 254,932 ounces of gold and 19.1m ounces of silver. Costs and capex for 2017 should meet expectations while the group’s financial position is “very robust“, as it completes early repayment of its bonds over the coming days. Bustamante also reported “encouraging results” across its brownfield exploration programme.

Its cash balance has also strengthened to hit $256m at 31 December, up from $140m one year earlier, net debt falling from $183m to $97m over the same period.

Hochschild’s share price is down 1.13% at time of writing. Given its forecast valuation of 38.2 times earnings, I can see why. RBC Capital recently downgraded the company due to its valuation, although it said the story remains “compelling“. Much depends on the progress of its exploration programme. However, forecast earnings per share growth of 69% in 2018 and 21% in 2019 point to a shinier future. Maybe wait for a cheaper entry point.

The post Why you may regret not buying growth monster BHP Billiton plc appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Contrarian investing involves buying out-of-favour companies and holding them until their prospects improve. It’s a brave approach that requires going against the herd, but there’s no doubt the strategy can generate sizeable returns when it’s successful. Here are three companies that are fit the bill right now and may have long-term turnaround potential.

Oil price volatility

It’s been an uncertain two years for Royal Dutch Shell (LSE: RDSB) investors.

With the oil price dropping dramatically from around $105 per barrel in 2014 to just $30 earlier this year, Shell’s share price has suffered considerably and there’s been much talk of whether the company can continue to pay out its dividend.

Indeed, Shell’s current dividend yield sits at a high 7.4%, suggesting the market believes a cut is imminent.

However with the oil price having bounced back to $50, sentiment towards the oil majors is already improving and Shell’s share price has rallied 40% since its January low. Does Shell have further to run?

While the bad news is that earnings for FY2016 are forecast to fall around 19% year-on-year, the good news is most analysts have faith that Shell’s dividend is safe for now.

None of us can be certain whether the oil price will rise or fall in the short term, but for long-term investors prepared to ride out the volatility I believe now could be a good time to take a look at Shell.

Commodity crash

BHP Billiton (LSE: BLT) has endured a roller coaster 10 years. A decade ago, the mining boom was in full swing and profits were soaring. Fast forward to today and with commodity prices having fallen off a cliff, and BHP in strife in relation to the Samarco Dam collapse, its share price has taken a hammering.

With earnings for FY2016 forecast to fall 87% and the once-mighty dividend slashed, it’s understandable that sentiment towards the company is low right now. However, with BHP’s share price having fallen from around 2,500p in 2011 to just 830p today, could it now be worth a nibble?

It may take a while for BHP to turn things around, but I do believe the world will have a need for iron ore, copper and oil in the future.

For that reason, a contrarian position in BHP might be rewarding in the long term.

High street woes

Sentiment is also at rock bottom for high street stalwart Marks and Spencer Group (LSE: MKS). It appears investors have lost faith in the endless restructuring promises and the retailer’s share price has fallen sharply from almost 600p two years ago to around 370p today. Is there any value at the current price?

New CEO Steve Rowe recently warned shareholders that a turnaround won’t happen “overnight”, yet the company still managed to increase its full-year dividend by 3.9% and announced a special dividend of 4.6p per share that will be paid in July.

With the retailer now trading on a P/E ratio of 11.7 times next year’s earnings, and with the dividend yielding over 5%, the risk/reward payoff looks intriguing.

This could be one to buy now and stash away for the future.

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Edward Sheldon owns shares in Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Their joint recovery in recent weeks is sweet relief for investors, with BHP Billiton up a whopping 66% in the last three months, and Tesco up almost 20%. Both stocks seem a little healthier but there could still be plenty of trouble ahead.

Metal Men

Happy days for investors in BHP Billiton, as a weaker US dollar and signs of a revival in steel demand has sent the share price spiralling, with the stock leaping 5.25% on Tuesday alone. The shift in sentiment has been remarkable, given last year’s misery, and has swept across the metals and minerals sector. Macquarie reports that some order indices for steel are at record levels. Copper, aluminium, nickel and zinc futures are also rising, although iron ore is yet to shine, as supply remains high.

Citi’s global commodities research team reckons that global markets are returning to “normalcy“, an unlovely word that will be music to commodity investors’ ears. But how quickly things change. One month ago Jefferies was downgrading BHP Billiton on expectations that commodity prices would fall. It reckoned that the price of copper and other mined commodities would reverse, with the iron ore price falling from $64 a tonne to below $40/t this summer.

I still expect slowing Chinese growth and its shift towards consumption to hit demand for metals, but continued stimulus could prove me wrong in the short term. Investors need to look to the long term, and they might consider that today’s valuation of 11 times earnings is a good entry point, although they must offset this against the low expected yield of 2.3%. A forecast 90% drop in earnings per share (EPS) in the year to 30 June, followed by anticipated growth of a whopping 206% the year after, suggests that investors should buckle up for a bumpy road.

Grocery Gains

Tesco is another stock I have been bearish on for several years, along with most of the investment world, but Dave Lewis continues to show that he knows what ails the supermarket chain. The question is whether he – or anyone – can get the profits flowing again. Its reported £162m pre-tax profit for 2015 cheered after the previous year’s disastrous £6.3bn loss, but also showed how far Tesco has slipped since its glory days.

Those days will never return, given today’s intensively competitive market. However, one reason profits were relatively low is that the money is being ploughed back into the business, to drive future growth. With no dividend to worry about, Tesco can do that. Shoppers don’t moan about Tesco as much as they did, that phenomenon seem to have blown over, along with the store’s expansionary overreach. The two may be connected.

Tesco management now faces a host of challenges, including wafer-thin margins of 0.4%, while Lewis’s warning of a “challenging, deflationary and uncertain market” is still ringing in investors’ ears. The share price has taken a knock, falling 7% in the last week, yet Tesco still trades at more than 19 times earnings. That heady valuation is usually reserved for more rewarding prospects than this one.

The post Is This As Good As It Gets For BHP Billiton plc And Tesco PLC? appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Contrarian investors who bought at the bottom of the market deserve to be congratulated for their courage, craziness and sheer good fortune. But will it last?

Large caps, massive gains

Incredibly, Anglo American is up 77% in the last month. That kind of turnaround simply shouldn’t be possible in a company with a market cap that runs to £7 billion. Glencore, with its £18.8bn market cap, is up 45% over the same period. These are multi-billion pound companies behaving like penny stocks.

BHP Billiton and , have been relatively muted by comparison, rising 10% and 13% respectively. But even that is pretty incredible, given that BHP Billiton has just admitted to a half-year loss of $5.67bn and slashed its dividend, while Rio Tinto ‘fessed up to a 27% drop in consolidated sales revenues to $34.8bn and dumped its progressive dividend policy at the same time. 

Bulls Rush In

As a long-term commodity stock bear, who sold out of BHP Billiton and spent the subsequent two years shouting to anybody who would listen, warning that the China growth story couldn’t last forever, I am now in a difficult position. I missed the recent rebound and I still don’t believe in it, but I am also aware that this may just be sour grapes.

Investor sentiment has turned on a sixpence, as belief flooded back into the market. Last month was certainly a great time to go bargain hunting. The big miners were due a slice of luck, as they have been working hard to strengthen their overloaded balance sheets by boosting production, slashing costs, cutting capex, dumping non-core assets, slashing dividends and overhauling their strategic plans.

Bear In A China Shop

The truth is that the rebound isn’t down to anything the miners have done. Once again, it is all about China. Investors have been cheered by signs of a rise in Chinese infrastructure and construction demand, even if it is largely credit-fuelled. Iron ore prices recently recovered to $50 a tonne, up 30% from their December lows. Copper is also up to $2.16 per pound, up 10% from around $1.96 in mid-January. Where copper and iron ore lead, mining giants are sure to follow.

Yet I do not see Chinese demand recovering to former levels. Even if its economy avoids a hard landing, the country is shifting towards consumption and away from infrastructure and exports. Chinese PMI readings continue to slip, with manufacturing hitting a seven-year low, with the privately compiled Caixin measure showing a twelfth consecutive contractionary reading.

Commodity prices and stocks fell so low, so fast, that some kind of rebound was likely as valuations became irresistible. It is cruel to call this a ‘dead cat bounce’, but amid continuing signs that the global economy is slowing, it seems daft to hail it as the start of a serious recovery either.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The trouble is, highly cyclical mining companies like BHP and Rio don’t deserve to trade at high valuations. What’s more, as a value investor I’m unwilling the buy either of these two companies unless they’re trading at a deep discount to intrinsic value.

Simply put, intrinsic value is the actual value of a business or an asset based on an underlying perception of its true value including all aspects of the business, both tangible and intangible. However, it’s almost impossible to calculate an intrinsic value for these two miners with so much turmoil in emerging markets. 

Impossible to value 

There are few analysts that know more about company valuation techniques than Aswath Damodaran, Professor of Finance at the Stern School of Business at NYU, but even he is having trouble placing a value the shares of miners such as BHP and Rio. 

This time last year, Professor Damodaran tried to evaluate Vale, the world’s third-largest iron ore producer after BHP and Rio. A detailed analysis conducted in November 2014 led the professor to conclude that the company’s shares were worth $13.60, which was 60% above what were they were trading at the time.

Six months later, Professor Damodaran revisited his calculations and found that Vale’s intrinsic value had dropped to $10.71. And then, back in September the professor revisited Vale for a third time. Plugging the most recent set of figures into his calculation led to the conclusion that Vale’s intrinsic value had dropped further to $4.29.  (Vale is currently trading at $4.36.)

It’s reasonable to assume that both BHP and Rio’s intrinsic values have fallen in line with Vale’s over the same period. 

Guessing game 

Even the City’s top mining analysts, who know the sector inside out, are struggling to predict accurately what the future holds for BHP and Rio Tinto. 

This time last year analysts were expecting BHP to report earnings per share of $2.56 for 2016, but now analysts only expect the company to report earnings per share of $0.72 for full-year 2016. Similarly, City estimates for Rio’s earnings per share have fallen from $5.10 to $2.40. 

The point here is that the future is extremely uncertain for miners. As a result, it is almost impossible to produce an accurate valuation for the companies.

Indeed, if you’d purchased BHP shares this time last year, at 1,000p, based on the prevalent City forecasts at the time, BHP would have been trading at a forward P/E of around 6. 12 months on and at 1,000p BHP’s valuation has surged to 27.4 times forward earnings. Rio is currently trading at 13.7 times forward earnings.

That said, BHP and Rio might make good income investments. Rio currently offers a dividend yield of 6.3% and BHP supports a yield of 7.8%. However, without any pricing power it’s difficult to say how much longer dividend payouts will be maintained at present levels.

The post Is It Time To Buy Rio Tinto plc And BHP Billiton plc? appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.