BHP’s ‘once in a lifetime’ dividend yield praised by market

BHP Billiton chief Andrew Mackenzie has vowed to maintain the company’s generous dividend despite weak commodity prices. Photo: Pat SullivanBHP Billiton’s dividend yield has reached “once in a lifetime” levels, after the company kept a promise to grow the return to shareholders despite posting its lowest profit in more than a decade, analysts say.
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BHP paid out $US1.24 per share in total during the 2015 financial year, which was 2 per cent higher than the previous year despite an 86 per cent slump in statutory profits, and despite the fact the company’s revenues have shrunk on the back of the South32 demerger.

The company’s promise to continue growing dividends prompted its London listed shares to soar by 8 per cent in early trade on Tuesday night before closing 6 per cent higher.

When the dividend is compared to BHP’s share price, the miner is now boasting a better dividend yield than all of Australia’s major banks.

Dividend yields are calculated by dividing the dividends per share by the company’s share price, and the measure provides an insight into how much return an investor is getting on their investment.

The yield on BHP’s Australian shares was 7.36 per cent at the close of trading on Tuesday, while the yield on BHP’s London shares was beyond 8 per cent.

For comparison, Rio Tinto’s yield is hovering just below 6 per cent.

Shaw Stockbroking analyst Peter O’Connor​ left clients in no doubt about the significance of the yield.

“It is worth noting that BHP’s progressive dividend per share ($US1.24) puts BHP on a once in a lifetime/generation dividend yield of about 7 per cent,” he said in a note to clients.

Bernstein analyst Paul Gait said BHP’s yield was higher than had been seen in the mining sector for at least 20 years, if not longer.

“In recent history this is as high as I’ve ever seen it,” he told Fairfax Media.

“So the question is, what moves? Do they cut the dividend or does the share price go up?”

Speaking on Tuesday evening, BHP chief executive Andrew Mackenzie said the company would prefer to cut spending on growth projects rather than cut the progressive dividend policy, which guarantees the dividends will never fall.

“Over my dead body sounds a little strong but it’s almost right,” he said, in reference to the circumstances in which he would be willing to cut the dividend.

“You shouldn’t doubt our commitment to maintain the progressive dividend, quite independent of any divestment or any additional sources of cash. Our ability to defend it comes from our exemplary program for productivity and efficiency and the strength of our balance sheet.”

Mr Gait said the size of BHP’s yield left investors with a “fairly binary” decision to make.

“To the extent that people are somewhat sanguine about the macro environment, this tells them this is rock-bottom prices for BHP Billiton,” he said.

“BHP Billiton is pretty adamant that the dividend is secure, they claim there is plenty of flexibility in the balance sheet and in the capital structure to allow them to weather the storm and they are not going to cut it, ergo this is the time to fill your boots on BHP Billiton shares.

“If, however, you are concerned about the global macro conditions, you have to put BHP Billiton’s assurances to one side. If you are concerned that BHP is going to continue to push tonnes rather than prioritise value then there is further downside on the commodity deck, in which case BHP will eventually have to cut the dividend.

“For me, I think we are at the bottom of the cycle, I think the pain is behind us rather than in front of us and therefore this is the time to buy the mining stocks.”

Liberum analyst Richard Knights said he did not think BHP’s dividend was in danger of being cut in the near term, but he said the company may have to cut eventually if conditions continue to deteriorate.

“Further down the line I wouldn’t rule it out. If we had copper below $US2 per pound, iron ore below $40 per pound and oil where it is for a 12-month period they would be unlikely to be able to cover the dividend without further borrowing, and their credit rating would be already under significant pressure,” he said.

“At that point, they may not be willing to add leverage.”

Copper was fetching $US2.29 per pound on Tuesday evening, while the benchmark iron ore price was fetching $US53.45 per tonne.