BHP Stock Has Big Potential in 2016
The Australian mining giant BHP Billiton Limited (ADR) (NYSE:BHP) has slashed its dividend by 75%. This is BHP stock’s first such cut since 1988. It was predictable, however, as BHP stock has also suffered amid the carnage of the raw materials sector in general, marked by the collapse in the prices of crude oil, iron ore, coal, and other commodities. Yet, BHP stock is set to recover, even amid the enduring commodities slump.
BHP lost $5.67 billion in the first half of fiscal 2016. It was its first loss in more than 16 years. BHP promptly cut its dividend. In February, Standard & Poor’s cut BHP’s rating from “A+” to “A.” The ratings agency warned that it could apply a further cut if BHP failed to improve its liquidity and review its dividend policy.
Given that BHP stock has seen single-day increases of three percent amid a more optimistic outlook for commodities, it is foreseeable that BHP stock, now trading at about $23.00, could hit $30.00 by the end of March. Coupled with a reliable—if reduced—dividend, BHP becomes an interesting stock pick in an overlooked sector.
Yet, Fitch Ratings affirmed BHP’s “A+” rating. Fitch said that the dividend cut would ensure the necessary financial flexibility needed to improve its credit and maintain stability over the next two years.
BHP’s lower dividend means that the 2017 payout would be “a very manageable obligation” below $0.5 billion. It would have been some $6.5 billion under the previous policy. (Source: “S&P takes BHP Billiton off credit watch,” The Financial Times, February 29, 2016.)
As a result of this reduced payout, BHP should have free cash flow after capital expenditure and dividends of about $4.2 billion–$4.5 billion in the financial year 2017, a portion of which could be used to pay down debt and protect its “A” rating.
Whether you take Fitch or S&P’s rating as the fairest one, it stands that it is an affirmation of BHP Billiton’s solid financial position within the mining sector. It confirms that BHP is “ready to acquire growth through our extended nadir of the commodities price reversion.” (Source: “BHP Billiton’s dividend surrender opens the window on opportunity,” Financial Review, March 2, 2016.)
BHP remains one of the world leaders in the mining sector. The company mines bauxite, coal, copper, manganese, iron ore, uranium, nickel, diamonds, silver, and titanium. It also produces oil and natural gas.
Slower economic growth in many emerging markets coupled with less demand from China has fueled bearish sentiment on commodities. Indeed, many mining giants, such as BHP, have raised production to compensate for the lower prices. This is, in a sense, what Russia and Saudi Arabia have been doing with oil. They can do this because they are big enough to increase output with little, if any, investment.
There is no doubt that BHP, despite its size, has also suffered from the commodity slump. However, experience and good management have kept it afloat and doing remarkably well compared to other commodities companies. (Source: “BHP Billiton’s (BHP) Prospects Bright amid Market Headwinds,” Zacks, March 1, 2016.)
At worst, BHP stock will remain stable. Should iron ore, copper, or coal move up in price, BHP Billiton will enjoy a solid financial base from which to grow.