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BHP Billiton - Higher interim profits and dividend

George Salmon | 21 February 2017 | A A A
BHP Billiton - Higher interim profits and dividend

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Operating cost improvements, combined with higher prices for all the group's major commodities, helped interim profits rise sharply. Half year earnings and the dividend were both slightly above analyst expectations. The shares rose 1.5% on the news.

Our view

BHP should be a giant cash machine. Digging up iron ore for $15 a tonne then selling it for $55 is a pretty straightforward business model. It's much the same story in the group's oil business.

However, there is only so much that BHP can control. Not so long ago, a downturn in China saw commodity prices, and so group earnings, fall dramatically. With the debts taken on before the commodity crash hanging over the group, it was forced to focus on repairing the balance sheet, and scrapped the progressive dividend policy. Going forwards, BHP says it will pay out a minimum of 50% of earnings. In a highly cyclical industry, this seems a more sensible approach.

No miner is without risk; BHP investors will be well aware of the disruptive industrial action at Escondida, and ongoing fall-out from the Samarco dam disaster. However, even at the bottom of the cycle, many of BHP's Western Australian iron ore assets were robustly profitable. We feel such high-quality assets make the group one of the big, diversified miners best placed to weather the cycle.

At present, the group's decision to pay out more than the minimum percentage of earnings targeted by the dividend policy is symptomatic of the more favourable conditions in the sector. In the longer term, investors should remember that since the dividend is now a function of the bottom line, it could well jump around a bit in the years to come.

Half year results:

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased 65% to $9.9bn.

In line with the policy to pay out a minimum of 50% of earnings, the half interim dividend is 40 cents per share, two thirds of basic earnings per share. This amounts to a payment of $2.1bn, which is more than covered by the group's free cash flow of $5.8bn.

Net debt has fallen by $6bn to $20.1bn, with the gearing ratio (a commonly used measure of miners' indebtedness) dropping from 30.3% to 24.3%.

Capital expenditure of $2.7bn is 38% down on the first half last year. Expectations for full year spending have been nudged up slightly to $5.6bn, reflecting the successful bid for Mexican oilfield Trion and positive drilling results at LeClerc (Caribbean) and Caicos (Gulf of Mexico).

As a result of ongoing industrial action at Escondida (Chile), copper production guidance for the 2017 financial year is under review. The copper business contributed around 17% to underlying EBITDA in the half. Production guidance remains unchanged in the iron ore (c. 42% of EBITDA), coal (c. 20%) and petroleum (c. 20%) divisions.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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