The first quarter stock market performance was something of a surprise given that the Fed rate cuts hoped for failed to materialize. The good news is that rate cuts have been pushed out because of robust economic conditions, helped by strong employment, with some evidence that inflation is abating. The market is currently pricing in two rates cuts for the year.
Natural resource companies are currently focusing less on spending available cash and capital, which is improving balance sheets by reducing debt. Simultaneously, free cash flow is being returned to shareholders in the form of 1) increasing fixed dividends, 2) high variable or special dividends, and 3) share repurchases. There has also been M&A activity, which has been accretive to shareholders. More recently, energy stocks have rallied on higher oil prices, which have surged from $70 to $90 per barrel. Higher oil prices are typically a boon for oil companies, which should produce a lot more free cash flow this year.
Among NDIV’s top performers were Diamondback Energy (+32.0%), Kinetik Holdings (+22.0%), and Viper Energy (+25.1%).1 Click here for NDIV's top 10 holdings.
Diamondback Energy operates as an oil and natural gas company focused on onshore oil and natural gas reserves in the Permian Basin in West Texas. Diamond recently announced a deal to acquire Endeavor Energy Resources, as it seeks to secure prime acreage to ramp up production amid higher oil prices.
Kinetic Holdings is a midstream energy name that is recapitalizing its business after posting healthy earnings results. It is doing a secondary offering and restructuring its debt.
Viper Energy, an LP subsidiary of Diamondback Energy, topped earnings expectations, generating operating income of $204.7 million during the quarter on strong production volumes.
Detractors on performance for the period were Ternium Resources (-8.5%) and Gerdau (-8.4%).
Ternium is a flat and long roll steel producer. Despite a down quarter, it is likely a beneficiary of near sourcing opportunities in Mexico. Demand for steel is strong in Mexico (where shipments reached an all-time high in the recent quarter) and Brazil, two of Ternium’s main markets.
Brazilian steel producer, Gerdau, revised its outlook downward. In the recent earnings release call for the fourth quarter of 2023, Gerdau discussed its financial performance and strategic initiatives in the face of global market challenges. Similar to Ternium, infrastructure spend and nearshoring could sustain growth in the face of cheap Chinese steel competition.
Launched in August 2022, NDIV is comprised of dividend-paying U.S. exchange-listed equities operating primarily in the natural resource and commodity-related industries such as energy, chemicals, agriculture, metals & mining, paper products, and timber. The ETF provides the potential for income that is resilient to inflation and increased yield from the top performing assets.
Click here to see yield and performance tables.
All data as of 3/31/2024. Subject to change at any time. Fund holdings should not be considered recommendations to buy or sell any security. View Current Complete Holdings
Index Definitions:
The EQM Natural Resources Dividend Income Index (NDIVITR) is a gross total return index that seeks to provide investment exposure to dividend-paying equity securities of global companies operating primarily in the natural resource and commodity-related industries.
Morningstar® Global Upstream Natural Resources Index measures the performance of stocks issued by companies that have significant business operations in the ownership, management and/or production of natural resources in energy, agriculture, precious or industrial metals, timber and water resources sectors as defined by Morningstar’s industry classification standards.
1All percentages shown indicate total return of the sector for the month.