Mining companies are eliminating one of the main reasons investors bought their shares for more than a decade; the promise of ever-increasing dividends.

The so-called progressive payouts made sense in a commodity bull market. Now they’re a millstone for managements struggling with collapsing prices for the metals and minerals that determine companies’ earnings and the cash they have to return to shareholders.

Anglo American Plc on Tuesday suspended payments through the end of 2016 and switched from ratcheting them up each year to distributing a percentage of its profits. For some investors, it shows the way forward for an industry where the two largest players, BHP Billiton Ltd. and Rio Tinto Group, remain committed to increasing dividends every year.

“In a cyclical industry it doesn’t really make sense to pretend that either your earnings or your dividends can progressively increase as far as the eye can see,” Euan Munro, chief executive officer of Aviva Investors, which manages about $370 billion of assets, said in an interview Tuesday with Bloomberg TV. “Certain industries are more cyclical than others. It’s been pretty obvious for some time that times are tough for the miners.”

Anglo American CEO Mark Cutifani said Tuesday the company sought to share the positive times with its holders and “pull our tights in” together when they’re a lot more difficult.

In contrast, BHP and Rio Tinto are sticking with progressive dividends. BHP last month reaffirmed the policy it’s had in place since 2003. Yet both companies are vulnerable to a slump in iron ore, with the benchmark price for the steelmaking material falling below $40 a metric ton on Monday to a record low for data going back to May 2009. It’s down 80 percent since peaking in 2011 at $191.70. BHP and Rio spokesmen declined to comment.

Glencore Plc, the other of the top four U.K.-listed mining companies, was the first to curb dividends, canceling its full-year payment in September as part of a program to reduce debt and halt a rout in its shares. The company has had a progressive payment policy since before going public in 2011. A spokesman for Glencore declined to comment.

David Fuller's view

Mining has always been a highly cyclical industry.  Consequently, the big companies were somewhat prepared for a downturn.  In fact, they were masochistically looking forward to it, as an opportunity to outlast the competition and emerge even stronger in the next upturn.  

However, no one predicted the perfect storm which we are experiencing.  It commenced with China’s recession and change in economic policy.  Prior to that miners had been increasing capacity, benefitting from rapidly improving mining technologies and the ‘Middle Kingdom’s’ apparently insatiable demand.  That turned into a mirage and China today is more of a ‘Sleeping Dragon’ with a serious pollution problem.  

Today, we are now in the endgame of this cyclical downturn, evidenced by significant cuts in both production and dividends.  Among the big miners these commenced with Glencore in October, although all miners have been reorganising through a combination of selling or more easily mothballing marginal production facilities.

On Tuesday, Anglo American not only eliminated its dividend but also laid off 63% of its personnel in a dramatic downsizing operation.  Earlier, Freeport-McMoran cut its dividend, production and jobs in August.  Following these announcements the immediate market response for their shares were temporary rallies due to short covering. 

(See also: Dividends Could Be the Next Victim of the Commodity Crunch)

There is an interesting graphic in the article immediately above, pointing out that of “the world’s largest 500 companies by sales, the 20 expected to pay the highest dividend yields over the next 12 months, 17 are natural resources companies.”

Liking dividends, I hold three of the biggest yielders among these large companies in my personal long-term portfolio – Royal Dutch Shell B (7.99%), Rio Tinto (8.30%) and BHP Billiton (12.14%).  All are higher today following the Dollar Index’s drop but are still clearly overextended on the downside, due to concern over commodity prices and the ongoing risks of dividend cuts.  

My strategy has been to reinvest the dividends on weakness and I most recently did this with RDSB.  However, I am currently far from feeling secure with this strategy, under the circumstances, and I imagine a number of subscribers are also concerned. 

The two reports above seemed reasonably upbeat on RDSB, RTZ and BLT.  I think Shell and Rio can hold their dividends and quite possibly emerge from this crisis in somewhat stronger positions.  BHP is more vulnerable, after last month’s costly flood disaster in Brazil.  BHP’s management has already repeated its priority of protecting the balance sheet, which could mean a dividend reduction next year.  Overall, I hope that any of us holding these shares will be rewarded for our patience.