BHP Billiton dividend crumbles

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BHP Billiton dividend crumbles
The last mining heavyweight to fall on its sword, BHP (BLT) has finally cut its famously swollen dividend, officially joining peers Rio Tinto (RIO), Anglo American (AAL) and Glencore (GLEN) in tackling profits in freefall and massive debts. It was a reluctant but inevitable decision, given a disastrous six months amid an ongoing commodities slump which tipped BHP into its first loss in over 16 years.

After making a first cut in the payout for 15 years, anticipated by most of us for months, BHP shareholders will receive an interim dividend of just 16 US cents (11.3p), 74% less than last year's 62 cents. Despite the obvious need to reduce shareholder returns, this was much more severe than City estimates for 35 cents and Investec's savage forecast of 19 cents. And it's still a shock for shareholders who've received an incredible $77 billion since BHP and Billiton merged in 2001.

Analysts at Barclays now predict a full-year dividend of no more than 23 cents per share, an implied 82% cut year-on-year. And 2017 could be even worse. Using Barclays' profit estimates and BHP's new policy of a minimum 50% payout ratio on underlying earnings, shareholders might receive just 16 cents for all of next year.

That means BHP now offers a prospective yield of just 1.5% based on Barclays' numbers, and despite the benefits of a strong dollar when converting payments back into sterling. If it had kept the dividend unchanged this year the yield would have been an eye-popping, yet unsustainable, 11.5%.

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"BHP ended an era today, doing away with its once-sacrosanct progressive dividend (R.I.P.) and introducing one based on a minimum 50% pay-out ratio," lamented broker Investec.

"Such a form of reduction was expected, given the onerous annual pay-out and the lead set by all its peers, including Rio Tinto, and the flexible dividend now appropriately reflects the cyclical earnings characteristic of the mining industry in the 'new normal'. We expect that it will also appease the rating agencies, enabling BHP to maintain its 'A' rating."

Reporting its first net loss in 16 years, earnings crashed from $4.4 billion last year to a $5.7 billion loss in the first six months of this financial year, giving a loss per share of 106.5 cents .

Lower commodity prices brought revenue down 37% to $15.7 billion and net operating cash flow slipped 45% to $5.3 billion, while net debt stayed relatively flat at $25.9 billion.

Investors shouldn't ignore the fatal tragedy at its joint venture Somarco, either. It will present a headwind going forward.

Progress still made

Progress has been made, however: $7 billion of assets have been sold and the demerger of South32 leaves the group with decent core assets. Decreasing its capital spend by 40% to $3.6 billion in the first half, BHP expects to spend $7 billion this financial year. Diverting its cash away from onshore US operations, management reckon this will fall to $5 billion in 2017.

With its core operations focused on iron ore, copper, coal and oil, BHP was always going to suffer from the commodities rout, sparked by fears of slowing industrial growth in China. The world's largest importer of iron ore, China shipped in over 900 million tonnes of the mineral last year alone, yet news that the region is switching to a service-based economy has seen commodity valuations shrivel.

But with its housing market staging a recovery, analysts at broker VSA Capital believe concerns over China's economic growth are over-done, with BHP poised to take advantage of any uptick.

Surging on recent momentum, BHP had rallied 40% since mid-January, reaching a high of 801p on Monday, its highest level since early December. But the shares slipped 4% to 761p Tuesday, proving how easily sentiment can switch in current volatility. The shares are still too expensive for Barclays' analyst Amos Fletcher, who reckons they are worth 515p and repeats his 'underweight' rating.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.