BHP is now at its lowest price since 2005. believe the recent sell-off is an overreaction to recent events and at current prices we see longer term value in BHP. has recently added (1 December 2015) BHP to its AU portfolio given the quality of the asset and the large selloff in price. At current levels the stock is offering a dividend yield of circa 10%.
Declines in iron ore and oil prices, which are two key components to BHPs revenue stream, have crushed the share price recently. There is a considerable amount of speculation that BHP management will cut its dividend in response to the decline in the price of its key commodities.
has recently added (1 December 2015) BHP to its AU portfolio. Since its addition, its price has fallen a further 5.8% despite already having sold off considerably in the past 2 months. Further price declines in iron ore and oil which are two key components to BHPs revenue stream have sent the share price lower. There is a considerable amount of speculation that that BHP management will cut its dividend in response to the decline in the price of its key commodities.
BHP is our favoured, and only resources exposure in the Australian portfolio as it is highly diversified by region and commodity type, and due to its size has scale to operate at low cost with premium asset quality.
In the short term, we do not expect a change to the BHP dividend pay-out. Despite some head winds (commodity price declines and Samarco disaster), in our opinion management will attempt to look through these events and assess the longer term outlook for its business. Once the current supply/demand imbalances in commodities are resolved we believe they can recover steadily as global growth picks up.
In the past, BHP’s dividends have averaged 20% of its profits (EBITDA) from 1970 to 2012. believes that this is a good representation of the business dividend policy and is applicable to its future dividend direction. We think that 20% of EBITDA number is sustainable over the longer term but it does mean that dividends will end up being 50% and 65% of current levels in the long term.
The long term yield for BHP and RIO has averaged 2.9% and the ASX has averaged 4.9% yield. If we assume a reduction in dividends to US$0.60/sh for BHP and US$1.40 for RIO would deliver yields of 3.6% and 3.8%, respectively.