DIGGING FOR BURIED TREASURE: BHP LIMITED

By Matthew Kerr, Equity Analyst  

BHP Billiton (NYSE: BHP) is a mining company that engages in the exploration, development, and production of oil and gas properties; and the mining of copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and thermal coal. BHP is also involved in mining, smelting, and refining of nickel and potash production. The Company’s operations are situated in approximately 90 locations, including Australia, Europe, China, Japan, India, South Korea, Asia, North America, and South America. It is headquartered in Melbourne, Australia and was founded in 1885. Billiton is even older, founded in 1851. The company has grown from humble beginnings, and now is one of the largest companies in the world and employs around 80,000 people. BHP as it exists now was formed from a merger between BHP Limited and Billiton Plc in 2001.  As BHP is foreign company, non-Australian investors are subject to American Depository Receipt fees. The ADR trades on the New York Stock Exchange. 

Growth Opportunities

As a mining company, BHP’s financials tend to be influenced by the volatility of commodity prices. Commodities like copper, nickel and iron ore will be essential for building the infrastructure and technology that will aid the world’s decarbonization ambitions, and potash will help feed the world’s growing population. Fertilizer supply issues arising from the invasion of Ukraine and sanctions against Russia will likely extend beyond 2022 and potash will likely be another casualty included in the fertilizer disruption. Russia, Ukraine, and Belarus account for about 38% of global potash supply, 11% of nitrogen fertilizer and 7% of phosphate. A tight market could also incentivize companies with plans for large potassium-based fertilizer mining projects, like BHP. The decision to proceed with the Jansen stage 1 potash project in Canada is a significant milestone for BHP. BHP CEO Mike Henry said the project is aligned with BHP’s strategy of growing the company’s exposure to future-facing commodities in world class assets which are large, low cost, and expandable. Potash is a future facing commodity that enables more efficient and sustainable farming, which will be increasingly important in feeding a growing global population and in meeting the world’s need to decarbonize. Potash provides BHP with increased leverage to key global mega-trends, including rising population, changing diets, cleaner energy, and improving environmental awareness.

Further, BHP’s oil and gas portfolio completed a merger with Woodside energy on 1 June 2022, seeking to better position itself for decarbonization. The intended merger of BHP’s Petroleum business with Woodside will create a global top 10 independent exploration and production company, with increased scale and resilience. Shareholders are expected to benefit from significant synergies arising from the intended merger, and they will have greater choice in how to shape the relative commodity exposures in their own portfolios. These decisions and intended steps are anticipated to result in around half of BHP’s revenues being derived from the future facing commodities of copper, potash, and nickel by the end of this decade. The other half, comprising iron ore and coking coal, continue to see upside as they are essential in the manufacturing of steel.

BHP has seen EPS growth for 5 years, along with strong increases in revenue and net income. The company has increased cash on its balance sheet since 2017, and operating profit margin reflects that the company has been highly effective at keeping costs under control – beating the industry average by around 20% presently. The return on capital employed trend is impressive also- data shows that returns on capital employed have increased significantly in the past five years. The reason why that trend is significant is because this means that the company is earning more per dollar of capital that’s being employed– essentially, BHP is achieving more with less; since the business is using less and less capital to run its operation. The company is not quite undervalued as the price to earnings is slightly higher than the industry average, but its quick ratio is on the higher end, indicating that the company can easily meet its short-term debt obligations. Net debt is down $6 billion (-49%) from last year, and BHP’s credit rating is A-. (Standard and Poor’s) The debt maturity profile suggests that most debt matures in 2031.

Dividend Information

BHP’s dividend yield is currently at around 12%, and the company pays an annual dividend of $7.00. The payout ratio is currently at around 63%, but it is important to consider how much this ratio tends to fluctuate. The company has paid a dividend since 1984- the BHP dividend policy provides a minimum 50% payout of underlying attributable profit at every reporting period. The Board will assess, every reporting period, the ability to pay amounts additional to the minimum payment, in accordance with the capital allocation framework. In essence, BHP’s dividend is not fixed like most popular dividend companies in the United States. Looking at three 30-year charts next to each other (the stock price, TTM dividend payout, and TTM dividend yield) the company’s dividend follows how well the stock is doing; when the stock price is lower, the dividend payout and yield are also lower. Conversely, when the stock is appreciating the company’s yield and dividend payout increase. As mentioned before, commodity prices have a large effect on BHP’s financials- including its dividend. If commodity prices continue to go up, the dividend should be fabulous; if there is a commodities bust, however, it is likely the dividend will suffer. No dividend is ever guaranteed to stay at a consistent level, as is evident from looking through BHP’s long dividend history. 

Conclusion

While there are many risks of owning a company like BHP in your portfolio, such as the variable dividend policy, commodity price fluctuation and the ADR fees- the company has solid underlying performance and robust cost control. You can think of companies like this as dessert for your portfolio- it is okay to sprinkle them in, but adding too much could be disastrous. Foreign companies like BHP will typically reward shareholders for taking on extra risk with higher dividend yield and payouts; while it is likely that companies like BHP will have to spend money to decarbonize, the company is prepared and well positioned to benefit from the shift away from fossil fuels. BHP is generally considered to be a less risky foreign stock because of its size, long history, and how it does business- by mining ore and minerals not only necessary for typical manufacturing materials like steel, but also minerals that will be increasingly relied on in the coming decades for batteries,electronics, clean energy, and electric vehicles.