by Dividend Growth Investor | February 23, 2013 9:00 am
BHP Billiton Plc (NYSE:BBL), together with its subsidiaries, operates as a diversified natural resources company worldwide. This international dividend achiever has increased dividends for 13 years in a row.
The company’s last dividend increase was in August 2012 when the Board of Directors approved a 3.60% increase in the semi-annual distribution to $1.14 per share. The company’s peer group includes Rio Tinto (NYSE:RIO), Vale (NASDAQ:VALE) and Anglo-American (PINK:AAUKF).
Over the past decade this dividend growth stock has delivered an annualized total return of 19.60% to its shareholders.
The company has managed to increase EPS from 62 cents per share in 2003 to $5.77 by 2012. Analysts expect BHP Billiton to earn $5.54 per share in 2013 and $5.70 per share in 2014.
The Australian BHP Billiton Limited (NYSE:BHP) and the British BHP Billiton Plc are separately listed with separate shareholder bodies, but they operate as one business with identical boards of directors and a single management structure. The headquarters of BHP Billiton Limited, and the global headquarters of the combined BHP Billiton Group, are located in Melbourne, Australia.
The dual-listed company structure grants shareholders of the two companies the same proportional economic interests and ownership rights in the consolidated BHP Billiton Group, in such a way as to be equivalent to all shareholders of the two companies actually being shareholders in a single, unified entity. This structure was implemented in order to avoid adverse tax consequences and regulatory burdens.
In order to eliminate currency exchange issues, the company’s accounts are kept, and dividends paid, in United States dollars. For U.S. investors, shares of BHP Billiton PLC are recommended versus the Australian ones as the United Kingdom does not withhold any taxes on dividends paid to American Citizens. Each ADS represents two ordinary shares traded in London.
The company managed to boost earnings significantly between 2003 and 2008, as a result of several factors. These include strong emerging markets demand for metals such as iron ore and copper particularly from China. Other factors included the rebound in global economy, and the increase in commodities prices.
The 2008 – 2009 recession lead to decrease in profitability. Several competitors such as Rio Tinto (cut distributions to conserve cash, while BHP Billiton kept them as it had a strong balance sheet position at the time. The rebound in the global economy starting in 2009 has brought demand and commodities prices up, which increased profits.
Long-term growth could be aided by strategic acquisitions and investment in the business to uncover new fields for mining. Another bright spot includes the company’s effort to diversify operations, as evidenced by its investment in natural gas assets. Unfortunately, only large acquisitions will likely make an impact on the company’s bottom line. However, these large scale acquisitions are more difficult to complete due to regulations and the fact that governments do not want to see large players consolidating.
The company’s attempt to acquire Potash (NYSE:POT) and Rio-Tinto have been unsuccessful. In addition, earlier in 2012, the company scrapped its $80 billion in capital expenditures project pipeline. This occurred in the first year of the five year capital spending program. The company is scaling back on 50 billion worth of projects through 2016, but is still working on approximately $20 billion for which it had already committed the capital.
The company is a player in a commodities industry, and is a price taker. I do not see it as having much in competitive advantage, other than its scale of operations. Its performance is closely tied to global economic trends, and prices for metals. While it would be good to have exposure to “hard assets”, I do not believe that the company has the business characteristics that would enable it to continue raising distributions over the next decade.
I believe the streak of consecutive dividend increases was mostly due to the company being at the right place at the right time a decade ago, right before the commodities boom started. Long-term successful dividend growth investing is focused on selling branded, proprietary products or having some other form of competitive advantage to allow firms to weather any short-term weakness in the economy.
The return on equity has oscillated wildly between 15% and 50%. Between 2003 and 2007, it rose from 15% to 49%, followed by a drop to 15% in 2009. By 2011 it bounced back up above 45%, before tumbling to 25% in 2012. I generally want to see at least a stable return on equity over time.
Over the past decade, BHP Billiton has managed to substantially boost distributions. In 2003 the company paid 29 cents per share, which has increased to $2.20 per share by 2012. At the new rate of $1.14 per share, the annual dividend is $2.28 per share.
The dividend payout ratio has mostly remained below 50%, with the exception of a brief spike in 2009. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently BHP Billiton PLC is attractively valued at 12 times earnings, yields 3.30% and has a sustainable distribution. I do not believe in diversifying for diversification sake. However, given the fact that the company is simply a price taker participant in a commodities industry, the most I can rate the stock is a hold.
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