Is it time to buy BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited
(ASX: FMG) shares?
BHP Group and Fortescue are two of Australia’s largest resources businesses. Fortescue is known for being one of the country’s largest iron ore miners. BHP is also one of the country’s largest iron ore miners, but it also produces oil and coal as well.
Is It Time To Buy BHP And Fortescue Shares?
Since the start of 2016, BHP and Fortescue have been two of the best-performing large shares on the ASX. The Fortescue share price has gone up by 350% and the BHP share price has risen by 97%.
And then there’s all of the cash that has been paid to shareholders as well like the large BHP special dividend
and all of the dividends paid by Fortescue.
The question now is whether the resource giants are worth buying now.
On a trailing dividend perspective both BHP and Fortescue look good. BHP has a fully franked dividend yield of 5.3% and Fortescue has a fully franked dividend yield of 5.1%.
These yields look attractive when compared to several other ASX blue chips known for their yields. But how sustainable are they?
Cyclical And Volatile Nature Of Resources
Shifting supply and demand makes it very difficult to predict what the resource price will be in any given year. Indeed as prices go higher it leads to more supply, putting downward pressure on price until it’s unprofitable for the higher-cost producers who then stop until prices go higher because of lower supply.
It means we can’t ever rely on consistent earnings from resource businesses and therefore the dividend can’t be guaranteed either. It’s better to invest in price-makers rather than price-takers for good returns.
Indeed we have seen the coal price drop quite a lot recently, so that side of BHP’s earnings is likely to be a bit lower over the next 12 months.
It’s best to invest in commodity businesses when the price is low, like in 2016. To me it seems like we’re near the top of the commodity cycle, which is why I’d rather invest in the reliable shares in the free report below.
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