2 High-Yielding Dividend Stocks Set to Benefit from China's Stimulus

Last week, Chinese stock markets had their best week since 2008 after the country unleashed a series of stimulus measures, while promising more in the coming days. The stimulus is targeted at increasing consumption, as well as supporting the country’s ailing housing sector - which has long been a pain point for the world’s second-largest economy.

One of the key catchphrases of Chinese President Xi Jinping is that “houses are for living in, not for speculation.” While there is nothing to suggest that Jinping – who is known for his strong communist ideological beliefs – has changed his views, there are signs that the Chinese Communist Party is now looking to support the housing sector.

A Chinese language readout of the high-level meeting chaired by Jinping said that authorities “must work to halt the real estate market decline and spur a stable recovery.” The country has also eased home-buying restrictions in some cities, which will let some people buy more than one home.

While Chinese stocks – ranging from Alibaba (BABA), NIO (NIO), Xpeng (XPEV), and Tencent (TCEHY) rallied last week – there was also a rally in industrial metals, and by extension, in stocks of companies that produce them.

China is the Biggest Consumer of Metals

China, and particularly the Chinese construction sector, has been the biggest consumer of metals like steel, aluminum (ALQ25), and copper (HGZ24) for many years. The country’s real estate slowdown worked to the detriment of industrial metals with most barring copper falling out of investors.

Now, with China signaling strong support for its housing sector, metal and mining stocks have sprung back to life. I find BHP Group (BHP) and Rio Tinto (RIO) – both long-term underperformers – as plays on China’s economic stimulus. Both of these stocks have a fat dividend yield, and despite their recent rallies, they still look like buys.

RIO Has a Dividend Yield of Over 6%

Rio Tinto’s earnings are correlated to commodity prices - especially iron ore, which accounts for the lion’s share of its profits, followed by aluminum and copper. Iron ore is almost entirely used in steel production, so any pick-up in the Chinese construction sector should support steel demand. While it wouldn't be reasonable to expect a sea change in steel demand after China’s stimulus, it should help to stabilize the market and prevent further deterioration.

In terms of dividends, RIO has a variable dividend policy, and intends to pay between 40%-60% of its underlying earnings as dividends over the cycle. Its payout has been at the upper end of the range for the last 8 years since it pivoted to the new dividend policy in 2016, ditching the previous so-called “progressive” dividend policy, where it (like BHP) raised dividends every year.

RIO has a consensus rating of “Moderate Buy” from 12 analysts actively covering the stock, while its mean target price of $83.33 is 17% higher than Tuesday's closing prices.

RIO trades at a next 12-month (NTM) enterprise value-to-earnings before interest tax, depreciation, and amortization (EV-to-EBITDA) multiple of 5.33x, which doesn't look too demanding, especially given the expected uptick in industrial metal prices.

BHP Group is Also a Copper Play

While BHP is also a diversified miner, with the bulk of its revenues and profits coming from iron ore, it's also a copper play and operates the Escondida mine, which is the world’s biggest copper mine. In fact, BHP is the world’s second-largest listed copper miner after Freeport-McMoRan (FCX), which is a pure-play copper producer.

BHP is looking to increase its copper production – both organically as well as inorganically. Last year, it bought OZ Minerals in a bid to boost its copper footprint. BHP was also looking to acquire Anglo American (NGLOY), which would have further added to its copper output.

While that deal did not go through, BHP and Lundin Mining have announced the acquisition of Filo Corp. for nearly $3.25 billion as both companies seek to add to their copper production.

BHP trades at an NTM EV-to-EBITDA of 6.3x, and while those multiples are a premium to where RIO trades, they can be attributed to BHP's copper operations, as markets give a premium to copper producers. BHP is rated as a “Moderate Buy” by analysts, but the stock has run ahead of its mean target price of $61.25.

BHP Also Offers an Attractive Dividend Yield

BHP has followed a variable dividend policy since 2016, and intends to pay at least half of its underlying attributable profits as dividends at the end of each reporting period. While the stock’s dividend yield has come down amid the recent rally, its 4.7% yield is still more than triple the average S&P 500 Index ($SPX) constituent.

All of that said, I believe that both BHP and RIO still have room to run higher, despite the recent gains. They look like good stocks to capitalize on China’s economic stimulus – especially for someone who wants to play the theme without owning Chinese stocks.