BHP Billiton has released full year results. While profits have risen sharply, guidance on productivity gains has been tempered. The shares moved slightly lower after the announcement.
Results also saw BHP declare a record final dividend of $0.63 per share. That's $0.17 higher than 50% of earnings, which is the group's minimum target on the dividend.
Shareholders can expect the $10.8bn net proceeds from the sale of BHP's onshore oil and gas assets to be returned through a buyback or special dividend once that deal has completed.
Digging up iron ore for $14 a tonne then selling it for $57 is a pretty straightforward business model. It's much the same story in the group's other divisions. Viewed from that perspective, BHP resembles a giant cash machine.
However, it's not always that simple. BHP is struggling to prove it can keep a lid on costs while ramping up production. It's also got plenty of exposure to factors outside its control. For example, when commodity prices crash, they crash everywhere, for everyone. Anyone holding the shares through 2014/15 will know that only too well.
Unfortunately BHP had a mountain of debt going into the downturn, which suddenly became much more onerous when profits evaporated. It was forced to focus on repairing the balance sheet, scrapping a progressive dividend policy and slashing payments.
Going forwards, BHP says it will target paying out a minimum of 50% of earnings. In a highly cyclical industry, this seems a more sensible approach.
The worry is BHP has so far consistently paid out significantly more than that minimum, so one might be forgiven for wondering if it really has learnt its lesson.
To be fair, debts look a lot more manageable, and if you can deleverage while still paying a healthy dividend, why wouldn't you? That's a reasonable argument, but the allocation of capital between balance sheet and shareholders is still an area we'll be paying close attention to in the future.
Analysts are forecasting a 6.1% prospective yield this year. Investors will be getting a further windfall too, following the sale of the onshore US business to BP. Some will be sad to see it go, but it does sharpen focus on the core mining businesses.
BHP's asset base across these divisions is generally high quality. Even at the bottom of the cycle, the group was still robustly profitable.
This should mean BHP is one of the best placed to weather the cycle - provided management don't overcommit on the dividend, or get overconfident on debt levels.
Full year results:
Improved productivity helped volumes rise 8% over the year. Together with favourable price movements across most major commodities, this helped revenue rise 20.7% to $43.6bn.
However, higher costs ensured underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of $23.2bn only rose in line with revenue. That figure strips out discontinued operations, and $5.2bn of exceptional costs from impairments to Onshore US assets, US tax reform and the Samarco dam failure.
Within the underlying figure, Iron Ore remains the main contributor to group profit, although divisional EBITDA of $8.9bn is down from $9.1bn last year. BHP's improved profitability was driven by a strong performance from the Copper division, where EBITDA rose 84% to $6.5bn, and solid growth from the Petroleum and Coal businesses.
Higher spending in the Copper business led capital and exploration expenditure up 29.4%, but at $6.8bn spending was still within guidance.
Free cash flow was $12.5bn, broadly level with 2017, as the higher capital spend offset the higher profits. Net debt fell 33% from this time last year to $10.9bn, the low end of guidance.
Looking ahead, BHP expects markets to remain roughly balanced for the remainder of this calendar year, and its productivity is expected to improve by $1bn in 2019. That's slightly lower than previously expected, reflecting disposals and a slower pace of improvements at Queensland Coal.
The group continues to expect capital and exploration expenditure to be no more than $8bn a year in 2019 and 2020.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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