The reflation trade has been one of the big stories of the past year, with energy stocks, materials stocks, and names in the metals and mining sector coming back with a vengeance after they fell during COVID lockdowns. Since that point, the resurgence in both energy and mining and metals has cooled down, with many of the stocks now far off their 52-week highs.
This is because inflation fears have cooled somewhat, and China’s Evergrande woes have dampened expectations for growth in China, the world’s largest consumer of raw materials. For example, Evergrande could cause a slowdown in Chinese real estate and construction, which would badly hurt iron ore producers and steel makers.
As such, the world’s three big iron ore producers, Rio Tinto (RIO), Vale (VALE), and BHP Group (BHP) have all declined significantly in recent weeks, and now all yield over 10% in their dividend payouts.
Jefferies analyst Chris LaFemina recently put out a note, explaining that “if the reality in China is a soft landing in which the government manages the Evergrande collapse without causing contagion, these shares are undervalued and would likely outperform… This is our cautiously optimistic base case, and we reiterate Buys on Rio, BHP, and Vale.”
While caution is indeed prudent, these depressed levels and large payouts mean risk-tolerant investors can be paid generously to be patient while waiting for sentiment to improve.
Rio Tinto Plc (RIO)
The U.K.-based Rio Tinto is now down about 30% from its 52-week high set in May. Trading at just 6 times earnings, RIO Tinto looks cheap when compared to the broader market. With a dividend payout of $6.85 per share, shares are now yielding just over 10%. (See Rio Tinto stock charts on TipRanks)
The most diversified of the three companies in this article, in addition to iron ore, RIO also offers copper, aluminum, precious metals, and even diamonds and uranium.
Rio Tinto has a consensus Hold rating from the analyst community – two analysts have a Buy rating, one has a Hold and one has a Sell. The average Rio Tinto price target is $88.36, indicating 34.2% upside from the current price.
BHP Group Plc (BHP)
Australia’s BHP Group is down 34% from its 52-week high, which was also set in May. Shares of BHP now trade at a price to earnings multiple of 12, which is expensive compared to Rio Tinto, but still inexpensive when compared to the market as a whole. With a payout of $6.02 a share, BHP now yields 11%. BHP is well-diversified within energy and materials, with operations in iron ore, copper, coal, and even oil and gas. (See BHP group stock charts on TipRanks)
BHP is seen as a Moderate Buy by analysts, with the four analysts covering the stock evenly split between Buy and Hold. The average BHP Group price target of $37.61 represents 28.4% downside from current levels.
Vale S.A. (VALE)
Brazilian giant Vale surged to a 52-week high of $23.18 in July, before a steep decline over the last two months has seen it decline 37% to $13.80. Vale is now trading at a price to earnings multiple of just 5. Although shares are yielding an eye-popping 18.8% with a $2.74 payout, it is important to remember that as with other Brazilian stocks, the ultimate amount of this payout can vary depending on the company’s full-year fiscal results. Vale is heavily dependent on iron ore, but also derives revenue from nickel, copper, precious metals, and more. (See Vale stock charts on TipRanks)
The analyst community rates Vale as a Moderate Buy, with 5 of the 8 analysts covering the stock rating it a Buy, two calling it a Hold and one analyst giving it a Sell rating. The average Vale price target on the stock of $21.31 represents 54.4% upside from current levels.
While this has been a difficult time for iron ore companies and stocks related to raw materials in general, patient investors who buy these stocks now are getting them at a steep discount to where they were just a few weeks ago. Furthermore, they are being paid generously to hold on to them, with the 10%+ payouts offering a nice reward for waiting as well as a backstop for valuation.
The large cap status of these stocks should also hold up better than some of the mining juniors, in the event of further volatility. Lastly, as we saw earlier this year, if China’s growth concerns are sorted out or if inflation buzz heats up again, these stocks can all move to the upside quickly.
Disclosure: At the time of publication, Michael Byrne did not have a position in any of the securities mentioned in this article.
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