Indeed, at current prices BHP Billiton, Glencore Xstrata, Rio Tinto, Anglo American, Royal Dutch Shell and BP all trade at dividend yields over 5%, with Anglo American currently flirting with the 7% mark.
On the oil side, the reason for this, Buxton says, is that stocks are beginning to reflect a second wave of concern that sharp price falls may turn out to be much more entrenched than previously thought, which brings into question the sustainability of dividends. While, on the mining side, the argument has begun to shift from one of oversupply to one of demand strength, particularly in China.
Jamie Forbes Wilson, manager of the AXA Framlington Blue Chip Equity Income Fund, agrees that now is a good time to be looking again at commodities. But, he cautions, one should not expect either stock or commodities prices to rise sharply anytime soon.
Forbes-Wilson says he remains confident that dividends are sustainable which means the sector is looking very attractive from an income point of view. But, he said, if iron ore prices were to halve again from here, we would have to re-think that.
And, it is not just the commodities sector to which this applies. As Simon McGarry, senior equity analyst at Canaccord Genuity Wealth Management said in a note out on Friday looking ahead to British American’s first half results that are expected next week, the tobacco giant’s future plans look promising.
“Much has been written about the decline of the tobacco industry. The global shift towards plain packaging has received a lot of attention but it is not a game changer given that the packet stopped being part of the promotion and marketing mix a long time ago.
“Roughly 70% of volumes are in emerging markets which have been growing at 7.5% (from 2008-13) compared to 3.2% for developed markets. They have 80% market share in India and 78% in Brazil and have identified China, Indonesia, Philippines, Morocco and Myanmar as exciting new opportunities. They expect the adult middle class to rise from 800m in 2013 to 1.5bn in 2023. Given these favourable tailwinds their plan to grow the dividend (current yield is 4.5%), pursue M&A and do share buybacks does not seem so ambitious after all,” McGarry said.
The financial sector is also looking a much improved, with Lloyds, for example, rejoining the dividend ranks in the last quarter.
Indeed, both Forbes-Wilson and Buxton point to the value dispersion curerntly visible between large and mid-caps as something that bodes well for the large-cap space.
“The antipathy investors have shown towards megacaps for a while in general means the value disparity between them and mid-caps is large now and I think on a three to five year horizon they are opening up significant opportunities,” Buxton said.
For Forbes-Wilson, the skew toward mid-caps in recent months has made sense given the headwinds faced by the likes of miners and financials. But, he adds, with many of the heavyweight constituents so unloved and currently so under-owned, it doesn’t take much imagination to see that tide turning and the index pushing up.
With the next few weeks littered with earnings reports, including the likes of Barclays and BHP Billiton, the summer earnings season is shaping up to be a rather interesting one.
