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02/2/2020
23:39 | sarkasm: Should you buy BHP, Rio Tinto, or Saracen Mineral shares?
James Mickleboro | February 2, 2020 12:52pm | More on: BHP RIO SAR
Rio Tinto share price
I think that having a little exposure to the resources sector would be a very good thing for a portfolio.
This is because as well as offering the benefits of diversification, I believe there are strong potential returns on offer in the sector again this year.
But which resources shares should you buy? Here are three that I would consider buying:
BHP Group Ltd (ASX: BHP)
I think BHP would be a good option for investors looking for exposure to the resources sector. This is due to the mining giant’s portfolio of assets that are amongst the highest quality in the world. Thanks to their low costs and favourable commodity prices, these assets have been generating significant free cash flow for BHP. The majority of which has been returned to shareholders through dividends and buybacks. As long as the coronavirus doesn’t curtail global economic growth, I feel confident there will be more of the same in FY 2020 and FY 2021.
Rio Tinto Limited (ASX: RIO)
Another top option to consider in the resources sector is Rio Tinto. It also owns a number of world class assets across several different commodities. This has allowed the mining giant to generate strong free cash flow over the last few years. And as with BHP, it has returned the majority of it to shareholders through dividends and buybacks. If iron ore prices remain favourable in the near term, I expect Rio Tinto to be in a position to reward shareholders with generous dividends again in 2020.
Saracen Mineral Holdings Limited (ASX: SAR)
If you’re looking for exposure to the gold industry, then I think Saracen Mineral could be a great option. This is due to its attractive valuation, strong performance in FY 2019, and its very positive medium term outlook. In respect to the latter, a note out of Goldman Sachs reveals that it believes Saracen Mineral has the most compelling production and earnings growth profile under its coverage. It has forecast production of >800,000 ounces by FY 2024. This will be a material increase on the 500,000 ounces it expects to produce in FY 2020.
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20/1/2020
14:34 | loganair: Is the BHP share price a buy as US–China trade tensions ease?
The easing trade-tensions between the US and China are likely to assist Australian resources companies that deal with China. So, does this make the resources giant BHP Group Ltd (ASX: BHP) a buy?
BHP is definitely my pick of the ASX resource sector shares. It is a diversified natural resources company and is one of the world’s top producers of commodities like iron ore, coal and copper. BHP also has substantial interests in oil and gas.
As it is the third largest share listed on the ASX, not only can it leverage economies of scale, it is frequently bought and held by super funds and managed funds providers, and also by default is listed in many of the popular Australian exchange traded funds (ETFs) such as Vanguard Australian Shares Index ETF (ASX: VAS).
Growing dividend yield on the back of solid financials:
BHP’s strategy is to continue to consolidate its current assets, which involves divesting underperforming assets and reducing debt while also increasing operational efficiency.
Its extensive portfolio includes some of the largest mining assets in the world, which continue to generate large and ongoing free cash flows.
FY19 was a very successful year for BHP, with strong growth across its various segments. The mining giant produced a profit from operations of US$16.1 billion and an underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of US$23.2 billion at a margin of 53% for continuing operations. Also, there was a record US$17 billion returned to shareholders for the year. Dividend payouts were very attractive during FY2018–19, with BHP offering a fully-franked dividend payment of $4.76 per share.
BHP increased its dividends in 2019, boosted by strong iron ore prices. The company currently has a mandate to maintain a dividend payout ratio of at least 50%, which is very favourable for shareholders.
Historically, BHP’s dividend payout was well below that of the traditional high dividend paying shares such as the banks, because most of BHP’s profits were re-invested for growth. However, the mining giant has increased its dividend almost every year since 2010 and its dividend yield now sits at a very attractive 4.8%, fully franked.
Easing trade tension should boost growth:
The easing tensions in the trade war between US and China should assist BHP’s growth in FY20 and FY21, given that China accounts for around half of the world’s consumption of metals. In particular, it could lead to further strong demand for steel from China. Copper is another of BHP’s assets that has been performing strongly and is predicted to continue to do so.
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06/1/2020
22:04 | loganair: Will BHP’s share price be defined by coal in the 2020s?
The BHP Group Ltd (ASX: BHP) share price has performed strongly over the past four years, up 114%. Plus all the dividends.
But these days any business that is producing and exporting coal seems to be coming under a lot of public attention.
Coal is not BHP’s biggest division by a long shot, it’s iron ore that generates the king’s share of earnings for BHP. But coal generated US$3.4 billion of underlying earnings before interest and tax (EBIT) in FY19, which was more than copper and petroleum, although copper may reclaim its second place position in FY20.
The reason why coal could be so influential for BHP’s 2020s share price is due to climate change concerns.
Global demand for coal could fall from customers, and investors – which decide the share price – may exclude buying BHP shares because of coal for ESG reasons. Imagine if BHP divested its coal division, there could be a large increase of aggregate demand for BHP shares from investors which would boost the share price.
But if I were BHP management I wouldn’t sell the coal division today, I’d want to get a good price for the coal business. Demand from Asia for coal from countries like India is expected to rise considerably over the next 10 years as energy demand rises, which should at least support the coal price.
But compared to most other coal companies, BHP is taking more environmental action.
The company has said that it accepts its responsibility to take action on global warming and reduce its greenhouse gas emissions. One of the things it’s doing is to do new climate portfolio analysis in 2020 to outline plans to mitigate and adapt to global warming.
It has launched a five-year, US$400 million climate investment program to assist delivery of its public targets for its own operational emissions (scope 1 and 2) and to work with others across its supply chain to address scope 3 emissions that come from the transport, processing and use of its products.
The scope 3 goals will be presented in 2020 and will be designed to measure BHP’s impact and align with the goals of the Paris Agreement. BHP can’t force customers to reduce emissions, but it can work with them to reduce emissions, such as developing carbon capture utilisation and storage in industrial applications such as steel.
BHP is currently trading at 15x FY21’s estimated earnings. Iron ore is currently at a strong point in the cycle, so I wouldn’t want to buy shares right now – cycles normally change.
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07/11/2019
13:37 | adrian j boris: Global mining companies are re-examining how they pay their chief executives, aiming to diminish the impact of external factors--like swings in commodity prices--that can mask a leader's true performance.
At issue are big bonuses linked to total shareholder returns that can swell or shrink depending on how a company's share price performs. Miners--like companies in other sectors--say pay deals that rely too heavily on these bonuses can encourage risky behavior such as taking on big expansion projects or employing severe cost-cutting initiatives that, in some cases, take years to clean up.
Instead, mining companies argue pay should be linked more closely with strategic targets, because that would better reflect what an individual executive can influence. A number of big miners including BHP Group Ltd., Rio Tinto PLC and South32 Ltd. are seeking to make changes to their executive pay plans, some starting from next year.
"Mining companies' profitability, and therefore executive remuneration, is highly cyclical and strongly driven by market factors that are outside of their control," said Bill Hartnett, stewardship director at Aberdeen Standard Investments, which holds about 3.2% of BHP's London-listed stock for clients.
BHP already has seen the pay for its CEO decrease in recent years. Marius Kloppers, who stepped down as CEO in 2013, earned as much as $16 million a year during a tenure that coincided with a China-led boom in prices for some of BHP's top commodities including coal and iron ore.
His successor, Andrew Mackenzie, who took home a total of $3.5 million for fiscal 2019, has operated the company during a period of falling commodity prices as the world digests increasing amounts of supply from natural gas to iron ore.
Messrs. Kloppers and Mackenzie declined to comment.
Forecasting the cycle of commodity prices is a hazardous business. Bad weather sometimes disrupts supply, while demand for metals and minerals can rise or fall on political edicts, especially in China.
Another big weakness in the current system: Building a mine or bringing an oil field into production can take longer than the time horizon for determining bonuses. That is especially the case when permits are needed from regulators or new infrastructure such as pipelines or railroads must be built.
BHP's directors say linking more pay to a performance scorecard could be the answer. New stock awards would be held back for five years so that directors can be sure that management took decisions proven to create value. Those proposals were overwhelmingly accepted in final voting on the company's revamped policy at a meeting of Australian shareholders Thursday, with about 94% of holders of the U.K. and Australia listed shares agreeing to the changes.
Had this policy been in place for Mr. Kloppers, he would have earned $19 million, or about 25%, less during the roughly five years through mid-2013, BHP said. Mr. Mackenzie would have earned only 2%, or $1 million, more than he has in the years since succeeding Mr. Kloppers.
It might not be the last changes made by the company. Directors also plan next year to clarify and strengthen the link between performance on climate-change goals and pay, BHP said.
"We are at the early stages of engagement with other major miners on their remuneration plans," said Mr. Hartnett, the fund manager, who supports BHP's proposal.
Still, finding a balance that satisfies investors in different parts of the world isn't easy.
Two years ago, Rio Tinto proposed replacing long-term performance share awards with restricted stock, while at the same time lowering the contribution of those long-run bonuses to the CEO's total pay packet.
The proposal "was well-received in London. It was less well-received in Australia," Chairman Simon Thompson said at a shareholder meeting earlier this year. It was set aside.
Rio Tinto says it is talking to investors and could try again, noting its remuneration policy must be reviewed every three years under U.K. law. "The board remains of the view that restricted stock has considerable merits in a long-term cyclical industry such as mining," the miner said.
South32, which is also reviewing its pay structure, said it is hard to strike a balance that ensures it is still attractive to executives who might otherwise give the base-metals miner a pass.
South32 Chief Executive Graham Kerr this year relinquished 4.7 million Australian dollars (US$3.2 million) in long-term bonuses that were part of a deal agreed when BHP spun off the business. The bonus in big part reflected a more than 40% rise in South32's share price since it began trading in 2015.
"I don't think any of us expected to see South32 perform as strongly as it did over the first four years of its long-term plan," South32 Chairman Karen Wood said at an investor meeting recently. "We all felt--and by all, I'm including Graham very much in this assessment--that it would deliver an amount of money that we thought was not appropriate."
Mr. Kerr was unavailable for comment.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
November 07, 2019 08:14 ET (13:14 GMT)
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05/10/2019
09:03 | the grumpy old men: MOTELY FOOL
Are Fortescue, Rio Tinto and BHP shares a buy for their dividends?
Lina Lim | October 3, 2019 1:23pm | More on: BHP FMG RIO
ASX iron ore miners
ASX 200 iron ore miners BHP Group Ltd (ASX: BHP), Fortescue Mining Group Ltd (ASX: FMG) and Rio Tinto Limited (ASX: RIO) have all staged significant share price recoveries after iron ore supply woes throughout August. But are they a buy for their dividends, on current prices?
What’s the outlook for iron ore?
The iron ore spot price currently sits at around US$90 per tonne, while Chinese iron ore futures soared by more than 2% on Wednesday. I believe the market has largely internalised the news that the world’s largest iron ore miner, Vale SA, is returning to form after its tailings dam disaster earlier this year. The Brazilian miner maintained its 2019 iron ore and pellet sale guidance of 207–322 million tons, with sales expected to be around the mid-point of that range.
With that in mind, the Australian government sees iron ore prices in 2019 averaging around $80 per tonne FOB, reflecting the full effect of supply disruptions and firm demand from China. However, it also expects the price to gradually decline to average $57 by 2021, as the seaborne market gradually returns to balance.
In terms of global economies, China has maintained a steady level of steel production with its central bank announcing that it will continue to implement a prudent monetary policy and increase the strength of counter-cyclical measures. This should buoy the iron ore spot price and steel production levels.
On the flip side, US manufacturing purchasing managers’ index (PMI) signalled that manufacturing business activity was contracting at a stronger pace than expected. This reflects lower consumer demand and a contraction in new export orders.
In the short term, the iron ore spot price could maintain the US$80–90 mark as the Australian dollar continues to pivot lower on the back of lower interest rates. This could expose investors to both capital upside and strong dividends.
In terms of dividend yield, Fortescue pays a whopping 14% gross yield thanks to its 195% increase in underlying net profit and 266% increase in earnings per share in FY19. This represents a 78% dividend payout ratio – a delicate position where there isn’t too much space to increase dividends, while a lower iron price could potentially lower dividends in the future.
BHP and Rio Tinto, on the other hand, pay a 7.8% and 8.7% gross yield, respectively.
Foolish takeaway
Current market conditions are volatile as lower interest rates drive capital inflows into equity markets, while global economic is showing signs of sluggish growth. A short-term opportunity may exist for investors as iron ore prices remain steady and miners continue to reap the benefits of a higher spot price and increased steel production from China. However, investors should be wary of the medium–long term outlook and the implications that may have on dividends.
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21/9/2019
12:37 | the grumpy old men: lol
in the meantime
above think postive and be thankful for the divi
https://uk.advfn.com/stock-market/london/bhp-BHP/share-news/BHP-Group-PLC-Notice-of-Dividend-Currency-Exchange/80690672
https://uk.advfn.com/stock-market/london/bhp-BHP/share-news/BHP-Group-PLC-Notice-of-2020-Interim-Dividend-Date/80739470
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17/9/2019
07:40 | maywillow: SYDNEY--BHP Group Ltd. (BHP.AU) proposed changes to the way it pays Chief Executive Andrew Mackenzie that it said will lessen spikes in remuneration and better reward sustained good performance.
Under the new structure, which is expected to be voted on by investors at annual shareholder meetings in the U.K. and Australia later in 2019, BHP would cut Mr. Mackenzie's long-term incentive plan in relation to his base salary and introduce five-year deferred shares to his cash and deferred plan.
Those changes would reduce the maximum annual package of pay and bonuses by 12%, the world's biggest miner by market value said.
The existing long term incentive plan, or LTIP, "rewards volatility in performance rather than sustained outperformance, which is an aspiration for BHP," the miner said in its annual report.
Miners have come under increased scrutiny for plowing billions of dollars into mega projects or deals at the peak of cycles that years later sparked massive write downs as commodity markets cooled.
"There are material time lags between key long-dated decisions and their LTIP outcomes, leading to a discrepancy between participants who are the decision-makers, and those who eventually experience the positive or negative remuneration outcomes," the company said.
Other changes planned include a cut to Mr. Mackenzie's pension contribution rate and the introduction of a two-year post-retirement shareholding requirement.
Mr. Mackenzie earned US$3.5 million for fiscal 2019, down from US$4.7 million the year prior and below a target of US$7.7 million, said the company. The minimum available package was US$2.2 million and maximum was US$13.1 million.
His annual payout was weakened by a train derailment in western Australia late in 2018, where four locomotives and 268 loaded wagons ran loose for more than 50 miles without a driver before being forcibly derailed. BHP also faced operational problems at a number of mines and processing facilities, and the death of a worker at a coal mine in Queensland in December.
"From a performance perspective, while shareholders have benefited during fiscal 2019 from positive share price growth and significant shareholder returns, the year was a challenging one operationally for BHP, and the remuneration outcomes for fiscal 2019 for our senior executives reflect this," the company said.
BHP said Mr. Mackenzie's base salary will remain unchanged in fiscal 2020, at US$1.7 million. There will also be no change to annual fees for Chairman Ken MacKenzie or nonexecutive directors.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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(END) Dow Jones Newswires
September 16, 2019 22:01 ET (02:01 GMT)
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04/9/2019
18:12 | ariane: Sharecast
Broker tips: RBS, Anglo American, BHP, Kainos
rbs gogarburn building
Analysts at Berenberg lowered their target price on retail bank The Royal Bank of Scotland from 340p to 280p on Wednesday after management conceded that the lender was now unlikely to achieve a 12.0% return on tangible equity by 2020.
Berenberg said that despite a challenging environment, RBS' strategy was delivering "profitable growth, meaningful cost reductions and substantial capital returns".
But the German bank pointed out that for many investors, this was simply "not enough". In particular, Berenberg said many were struggling to look beyond the current margin pressure, which had prompted RBS' board to accept that it would most likely be unable to meet its return on tangible equity targets in time.
The broker's analysts reduced their full-year 2020-21 EPS estimates for RBS by approximately 6%, mainly driven by lower net interest margins, compounded by lower expected buybacks. Berenberg's 2019 estimates, on the other hand, did rise modestly, but only reflecting non-operational effects.
"Following these adjustments, we believe consensus EPS estimates remain 4-6% too low," said Berenberg.
However, while disappointing, Berenberg believed the share price reaction to the news had been "too severe", particularly considering RBS' double-digit dividend yield.
"We believe RBS is able to deliver a double-digit dividend yield, alongside share buybacks of circa £3.0bn over three years. However, these prospective returns are being ignored," they wrote.
Berenberg, which reiterated its 'buy' rating on the group despite the target price cut, highlighted that RBS' efforts to bolster returns and offset revenue headwinds saw operating costs fall by roughly £170.0m during the first half.
Guidance from the lender that full-year restructuring costs should be towards the lower end of the previously guided range of £1.2bn-1.5bn provided the analysts with further comfort.
Deutsche Bank revised its ratings on London-listed miners on Wednesday as it said stocks were due a rebound after the summer selloff.
"Like most cyclical sectors, mining corrected sharply through the summer months," it said. "Risk appetite has collapsed and global growth fears are back at the forefront. While uncertainty and macro risks are high, we see scope for a tactical rebound on a six-month horizon."
DB added that iron ore prices have reset to more realistic levels and valuations are now someway below its mid-cycle targets.
"Our mining valuation composite is now sending a clear buy signal; buying at current valuation levels has yielded an average six-month return of 23% and the sector has moved up in relative and absolute terms on every occasion," it said.
"The pervasive fear in the market is that we enter a 2015 type slowdown which saw negative China and global steel demand for several quarters. While we expect a deceleration in China steel demand in the year ahead (2% in 2020 from 5% in 2019) we think a 2015 style slowdown is an overly pessimistic scenario."
The bank said Anglo American remains its top pick. "The business is well diversified, valuation compelling and, at the current share price, the market is getting the 30% growth by 2022E almost for free."
Deutsche upped its stance on BHP Group to 'hold' from 'sell', cutting the price target to 1,750p from 1,900p following the recent share price correction.
"Our view that BHP lacks structural growth drivers is unchanged, however, capital discipline is holding and dividend levels should remain robust through the cycle," it said.
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26/8/2019
23:06 | loganair: BHP Group - An FTSE 100 share that seems to be currently undervalued is diversified miner BHP Group (LSE: BHP). The company faces an uncertain future, with the potential for a slowdown in the rate of global GDP growth expected to cause investors to become less positive about its financial outlook.
Despite this, BHP could offer long-term growth potential. Its valuation suggests investors may have factored in the risks faced by the business, with its P/E ratio of 9.6 relatively low compared to its historic range.
Unlike some of its mining sector peers, the company offers a significant amount of diversity in terms of its geographic exposure and the commodities which it mines. While this may not prevent a share price fall should the global economic outlook deteriorate, it could help the stock to outperform many of its industry peers.
With a dividend yield of 7.9% that’s covered 1.3 times by profit, the mining company’s income investing prospects appear to be attractive. While less robust than other high-yielding FTSE 100 shares, the risk/reward ratio offered by the business may mean it has the capacity to produce high returns over the long run, helping you to retire early.
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02/1/2019
00:03 | loganair: BHP - Growth, long-term horizon, Deep Value an Australian Commodity Company with a Secure 5.5% Yield:
BHP is an enormous commodities company with an enormous portfolio of assets. The company's asset portfolio is spread across materials essential to modern society.
BHP has incredibly strong cash flow and has worked to maintain low debt levels and a respectable dividend yield throughout the downcycle.
BHP's cash flow potential going forward makes the company a great investment, one that I highly recommend.
BHP Group is an enormous commodity company with a market cap of more than $100 billion. The company operates in the copper, iron, coal, potash, oil, and gas industries. The company's operation in a variety of commodities means it is subject to cycles.
Through this article, we'll see that the company's focused improvements of its financial position combined with its impressive asset portfolio make it a company I recommend investing in at this time.
BHP Growing Asset Portfolio:
BHP has a growing asset portfolio that'll provide the company with more secure earnings going forward.
BHP's four segments have continued to reach record production, showing their incredible potential. The company has been focused on cutting cost as possible and has continued to earn incredibly strong EBITDA. The company's total EBITDA from its four assets is anticipated to reach $23.1 billion annually.
That's incredibly strong for a company with a market cap of more than $100 billion and shows the company's earning potential.
More so, the company's costs for all of its major earners are well below the current prices of the commodities. For example, the company's $10.06/barrel petroleum cost is less than 25% of the current crude oil prices. That shows the company's impressive cash flow potential from its assets and how profitable they are, even in a commodity downcycle.
BHP Capital Spending:
To grow its investment assets, the company plans to invest close to $10 billion annually. The company's impressive capital expenditure is well above its 2017 capital production and almost equivalent to the company's 2016 capital expenditure. That impressive capital expenditure is incredibly affordable and is equivalent to almost 10% of the company's market cap.
That means that these impressive investments should help the company's cash flow to grow.
BHP Project Cost Cutting:
Looking at the company's Australia operations, the company managed to have record production at 7 mines while decreasing costs by 2%. The company's Queensland costs are well below current coal prices, allowing the company to earn cash flow. However, the company does anticipate near term 2019 Queensland coal prices as higher, due to higher strip ratios.
The Olympic Dam mine, which focuses primarily on copper and uranium, has seen its ore increase. The company anticipates Olympic Dam production to increase going forward. The company's South Flank asset is also targeting first ore in 2021, which will help to increase the grade and lump proportion. These things should help the company's cash flow to increase.
BHP Major Project Delivery:
In the Americas, the company's Escondida mine, one of the largest copper mines in the world, has seen copper costs down 15% with record throughput. The company's volumes are expected to average 1.2 Mtpa to 2025, with unit costs at <$1.15 per pound. The company has maintained incredibly strong costs despite a decreasing grade.
Going forward, the company anticipates production to continue at the current levels, which should mean continued revenue and earnings. That's incredible production in spite of the fact that the grade of the ore has declined some. The company also has desalination water secured, which will help to maintain stability and support costs.
Overall, this asset will continue to provide billions of long-term cash flow BHP.
BHP Oil Portfolio:
The company's petroleum assets are another important aspect of its earnings. The company has 1 billion barrels in reserves replaced over the last decade, with finding & development costs well below its peers. The company's low finding and development costs of just over $20 will mean significant cash flow potential for the company.
The company's current investments are profitable at less than $50/barrel. The company's pipeline of 8 projects has achieved average returns of >25%, which is an amazing return for shareholders. The company has continued to increase performance and improving its exploration and success rates. Low cost of lifting, with impressive assets, means strong earnings going forward.
As we will see going forward, BHP's portfolio of assets and growth potential make it a strong investment.
BHP Financial Position:
BHP has an incredibly strong financial position, a financial position that it has been focused on improving. As a company at the bottom of a cyclical operation, in the immediate term, its finances are everything.
BHP Financial Portfolio:
BHP has an incredibly strong balance sheet that provides it with continued flexibility throughout the cycle. The company's balance sheet has been tested under a wide variety of price scenarios, and this shows that the company has a buffer for price movements. The company is targeting a net debt in the range of $10-15 billion.
During a downcycle, the company expects net debt increasing to the upper end of the region, before it drops back down. This shows the company's financial strength; the company is keeping its debt in a downcycle low. The company has strong liquidity, with an undrawn $6 billion revolving credit facility, which shows the company's financial ability.
BHP Shareholder Rewards:
Going forward, the company plans to reward shareholders while maintaining flexibility. The company has focused on a minimum 50% payout ratio dividend, while providing additional rewards to shareholders. That dividend is currently almost 6%, which shows the company's strength. The company has paid out $9 billion over the minimum dividend since early-2016.
The company was forced to cut its dividend in 2016 due to a tough commodity environment. The company's 50% payout ratio has been still below the progressive dividend, but the company's special dividend has grown to above the dividend while maintaining the company's strength.
BHP Debt Balances:
Looking at BHP's debt balances, the company has a very balanced debt maturity portfolio. The company has roughly $2 billion in annual debt due from now until 2026. Given the company's annual earnings of roughly $10 billion per year, that means that the company can comfortably afford the debt going forward.
This helps to show the company's incredibly impressive financial strength.
BHP Maximizing Returns:
Overall, these strong financials, combined with the company's new dividend policy, will allow the company to have strong shareholder returns. The company has reduced its debt by $15 billion in two years, reducing net debt to a $10-15 billion range. The company has a new minimum 50% payout ratio dividend we discussed above which'll reward shareholders well.
More so, the company plans to limit capital spending, with less than $8 billion in capital and exploration expenditure per annum until FY 2020. The company anticipates ROCE back to ~20% by FY 2022. That shows the company's improving financial profile, which will allow the company to continue to maximize in its investment while having strong returns.
BHP's Challenges:
Like all other major companies, BHP faces challenges. BHP's single greatest challenge is that the company is in a cyclical sector. Coal, copper, potash, and iron are all commodities that often deal with a cyclical pricing setup. As a result, the company's cash flow can vary heavily from year to year.
Despite investors knowing the business is cyclical, the company's stock price varies with these cycles too. That means that I don't recommend this stock for investors with 1,2, or even 5-year timelines. Rather I recommend it for investors who have closer to a 10-year timeline.
Still, in the event of a drawn-out commodity crisis, the company's stock price, cash flow, and even dividends could be punished heavily. As a result, as an investor, this is a risk you need to be open too. No one will know when the next commodity crash will happen, but there almost certainly will be one.
BHP Valuation:
Trying to put a direct price valuation on BHP is difficult, due to the fluctuation in commodity prices. However, I'll try and provide some guidance.
BHP's net operating cash flow, which the company uses to retire debt and pay its dividend, is the single most important metric I recommend paying attention too. In 2016, the company's net operating cash flow dropped to a mere $14.6 billion in the commodities crash. However, it has since rebounded. Still, these levels are 20% below 2014 when the crash started.
However, BHP dividend payment is paying similar to what it was before the crash. As the company's cash flow recovers, which I anticipate to be over the next few years, as commodity prices stabilize and costs are cut, its share price should recover further.
BHP is currently trading at 30% below its mid-2014 highs, while cash flow has dropped 14%. As a result, I think the company is roughly 16% undervalued at this time. As its cash flow increases, I expect the company's share price to increase in turn.
This also means as a catalyst for investors to pay attention to, pay attention to the company's cash flow as it reports it in 2019. Should the company miss cash flow numbers drastically, if it's commodity price related, that's a risk, but if it's due to poor management, I'd recommend selling your shares.
However, even right now, when you invest, you're getting a growing commodities company, with strong cash flow, and a dividend yield of more than 5%. That company is trading at 16% below what it should be based off of its cash flow.
Conclusion:
BHP has low cost assets, which means continued cash flow during the downcycle. As commodity prices recover, the company's stock price should return to mid-2014 highs, which will provide investors with strong returns. At the same time, the company's financials are set up for a market crash, and the company continues to pay investors a 5.5% dividend.
These things together make the company a rewarding and strong investment decision. I recommend investing in BHP at this time.
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PLUS1
