As we enter 2020, it would appear the market is expecting the iron ore price to go down significantly, given the price of Australian mining stocks.
BHP, Rio Tinto and Fortescue are trading on approximate PEs of 12, 10 and 5 respectively.
If the iron ore price fails to fall as rapidly or as steeply as expected, these companies will continue to be hugely profitable and investors will be well rewarded over the coming 12 months.
Their profitability is also boosted by the current low value of the Australian dollar which hasn’t risen in line with the iron ore price as it has typically done in history.
There is one major factor that investors shouldn’t overlook when considering Iron Ore price – the China-US trade war.
The trade war has put the Chinese economy under pressure at the moment and traditionally the way China stimulates is by investing in infrastructure.
When you invest in infrastructure you need to make steel and steel requires iron ore, which usually comes from Australia and Brazil.
Going forward, if China comes under further pressure, you’d expect that stimulus to increase further, so iron ore companies could be seen as being fairly defensive investments at the moment.
In 2019, Australian miners paid out exceptional dividends. BHP paid out a gross yield of around 13% including franking credits, RIO around 14% and Fortescue 18%.
In 2020, Plato doesn’t expect yields as high, however we do still expect yields of around 8 or 9%.
With interest rates now negative (after adjusting for inflation) more and more investors, particularly retirees, will be looking to the share market for dividends in 2020.
While we do believe the big iron ore miners will continue to perform well, retirees should ensure they have a diversified portfolio, managed to take advantage of franking credits.