BlackRock says commodity firms likely to hike dividends

LONDON Wed Jun 22, 2011 4:26pm BST

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LONDON (Reuters) - Commodity-linked companies could potentially pay higher dividends over coming years as earnings rise and balance sheets get stronger, Richard Davis, a fund manager at U.S.-based BlackRock, said.

"Commodity prices are at attractive levels, cash flows are at record levels and earnings are at record levels," Davis said at a briefing.

Making the case for higher dividends, Davis cited the forecasted earnings of commodity companies in the U.S. benchmark S&P 500 .SPX this year, which at nearly 30 percent is below the expected dividend of only 22 percent.

"Natural resources are attractive on a valuation basis, mining sector balance sheets are getting stronger," Davis said, adding that demand growth for commodities over coming years will be strong.

Over the past 10 years prices of commodities such as oil and copper have surged on strong demand growth from China, India and other developing economies.

Copper, used widely in power and construction, hit a record high of $10,190 a tonne on February 15. That compares with levels around $1,500 a tonne in 2002.

China is the world's largest consumer of copper, accounting for nearly 40 percent of global demand estimated at around 19 million tonnes last year.

"To make any investment in commodities you have to be a believer in China, India and emerging markets," Davis said, adding that more than 50 percent of all commodities demand growth in the last 10 years was due to China.

"If Chinese copper consumption per capita (per head) goes from 5 kgs to 10 kgs or (overall) goes from six to 10 million tonnes, just think what sort of impact that would have on the copper market."

Copper supplies are expected to be constrained, partly because of deteriorating ore grades, and expectations are for a small deficit this year.

"(Supply is) constrained by lack of exploration success, infrastructure bottlenecks and shortage of equipment and skilled labour," Davis said.

BlackRock manages $45 billion overall in commodity equities and worldwide the company as at March 31, 2011 had $3.648 trillion under management.

BlackRock's World Resources Income Fund was launched early in May. Its top five holdings are Chevron (CVX.N), Exxon Mobil (XOM.N) Xstrata XTA.L, BHP Billiton (BLT.L) and Freeport MCMoran (FCX.N).

(Reporting by Pratima Desai;editing by Sue Thomas)