BHP Billiton have increased the full year dividend by 2.5% to 124 cents, despite a near halving of operating profits as lower energy and minerals prices took their toll. Cash margins (EBITDA) remained firm, at 50%, underscoring the asset quality within the group. Cost reductions of $4.1bn were delivered, two years ahead of target and the group expects to make further reductions this year. Underlying earnings per share declined by 52% to 120.7 cents.
The shares responded positively, rising by over 7% in morning trading.
BHP Billiton is sticking to its guns, paying an increased dividend, despite a sharp fall in profitability, caused by the commodity market weakness currently roiling the industry. Cash is King at times like these, and the low cost of assets like their Western Australian iron ore mines is critical. Having spent heavily on expansion, BHP is now able to cut capital investment back sharply, whilst still raising output.
Costs are sharply reduced too, providing vital insulation against the falling commodity prices. The South32 demerger earlier this year means that BHP Billiton is now very much focused on large-scale, low cost assets, clearly a good place to be in the current environment.
There is however only so much the company can do. All commodity producers are hostage to the cycle to some degree. The dividend is not fully covered and recent price movements in oil, copper and other group products are not helpful. The balance sheet is relatively lowly geared, but if the company keeps paying out dividends at this level, and market prices remain depressed, the pressure on the group will steadily rise.
So at the moment, the progressive dividend policy is playing out in investors' favour, and the stock yields about 7.5% on the dividend just announced. The Board say their commitment to the dividend policy, of always at least maintaining the payment, remains undiminished. But there is a reason that we keep stressing that dividends are variable and not guaranteed; events can sometimes overpower the best of intentions. Investors should bear in mind that ultimately, the BHP Billiton dividend is dependent on the future path of commodity prices which can fall as well as rise.
Costs were cut sharply. Shale oil drilling costs fell almost 20% last year, and are seen falling another 25 % in the current year. Underlying copper costs are expected to drop 15% this year, whilst iron ore looks set to follow 2015's almost 30% cost decline with a further 20% drop. Much of this is the benefit of past investments coming to fruition. The expansion of Iron Ore production has left Billiton with a cash cost per tonne expected to be just $15. Even at today's much reduced prices, this production will still be highly profitable.
Slower growth in China has led to a reduction in expected steel production and hence iron ore and coal demand. This will be offset by a lower supply of scrap, in response to the fall in its value. Higher cost producers are reining back, but there is an excessive quantity of new, low cost supply coming to market this year, which will keep pricing under pressure.
Copper markets will be well supplied in the near term, but should see a deficit of supply emerge by the end of the decade, reflecting underlying demand growth and declining ore grades at many mines.
Gas prices are under pressure in the USA from rising production volumes, not fully balanced by rising demand from power and industrial users. BHP expect these sectors to raise their usage of natural gas, in response to the price reduction and for further supplies to be exported as LNG.
Capital investment, which fell by a quarter to $11bn last year, is set to fall to $8.5bn this year and $7.0bn the following. With a dividend bill of approaching $4bn per annum, those lower costs will help to preserve the group's dividend paying capacity.
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