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BHP Billiton (NYSE: BHP), the world’s largest natural resources entity, is undergoing a painful restructuring to evolve into a more focused company.
Its shareholders have certainly suffered recently, with the stock price down for the last month, quarter, six months, and year of market action. For 2014, BHP Billiton is off by nearly 28%. But that does not diminish the long-term appeal of BHP, especially to income investors.
Long story short, BHP Billiton is selling off assets to emphasize its “four pillar commodities” of coal, copper, petroleum, and iron ore.
With growth down in China and quantitative easing beginning to unwind, this is not the market to be selling off natural resource assets. The fall in the stock price of BHP Billiton manifests that it is certainly not selling into strength. In addition, all of the “four pillar commodities” have fallen significantly, decreasing the value of BHP’s assets:
*Market Vectors Coal (NYSE: KOL), a major exchange traded fund for coal, is down nearly 22% in 2014;
*I-Path DJ-UBS Copper (NYSE: JJC), a major exchange traded note for copper, is down more than 18% in 2014;
*United States Oil (NYSE: USO), a major exchange traded fund for oil, is down over 40% in 2014; and
*iShares Global Materials (NYSE: MXI), a major exchange traded fund for iron ore, is down about 7% in 2014.
For long-term income investors, this makes BHP Billiton even more appealing, since the dividend yield rises when the stock price falls for a publicly traded company.
At present, the dividend yield for BHP Billiton is just over 5.2%. There is plenty of cash being made to cover the dividend.
BHP Billiton has a profit margin of 37.3%. Its return-on-equity is over 30%. From those profitable operations, the dividend payout ratio is just 27.4%. The average dividend yield for a member of the Standard & Poor’s 500 Index (NYSE: SPY) is about 1.9% with a payout ratio of 32%, according to FactSect.
So for now, BHP Billiton is paying a much higher dividend yield from a much lower payout than an S&P 500 member.
The question for income investors then becomes: Can BHP Billiton support the dividend yield for the future? Over the next five years, earnings-per-share are expected to increase by 5.6%. That is down considerably from 19.7% in the previous half-decade, but it is still heading in the right direction. The debt level is presently modest, and asset sales can trim that even more, further buttressing the cash flow.
Growth should return, too, especially in China.
The new economic reforms in China will strengthen the service sector. That means tremendous upside for the Chinese economy, as consumer demand is still in its nascent stages. Consumer spending accounts for about 70% of gross domestic product in the United States. By contrast, only about one-third of China’s gross domestic product comes from domestic consumption.
Unleashing the consumer purchasing power of the world’s most populous nation should greatly increase the demand for oil, coal, petroleum, and iron ore.
BHP Billiton is positioned well to meet the future needs of China and other emerging market nations. Consumer spending should increase the demand for commodities, along with the stock price of BHP Billiton.
Until that time, the dividend yield pays long-term investors to wait.
Jonathan Yates does not have a position in any of the securities mentioned in this article.
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