ii view: is dividend stock BHP Group one to own?

This mining mammoth offers exposure to a recovering China and a potentially attractive dividend.  

First-quarter production to 30 September

• Iron ore production up 8%
• Copper down 4%
• Petroleum down 9%

Chief executive Mike Henry said:

"BHP has started the new financial year with a strong first quarter of safety and production performance. Group production rose two per cent from a year ago driven by solid results in metallurgical coal and iron ore, our major growth projects made good progress, and we secured more options in copper, nickel and oil.

"With a period of uncertainty to navigate, our efforts to be safer, more reliable and lower cost are as important as ever. We are alive to the challenges ahead but we look forward with confidence in our people and our strategy."

ii round-up:

Mining giant BHP (LSE:BHP) reported an 8% increase in first-quarter iron ore production, its core commodity, while leaving its full-year production estimate unchanged at between 248 and 253 million tonnes. 

Copper production fell by 4% year-over-year as operations in South America continued to be hit by Covid-19 preventative measures. Iron ore generates around three-fifths of overall adjusted profits, copper a further quarter. 

BHP shares drifted around 1% lower in UK trading, having risen by over 40% since pandemic induced late-March lows. Shares for rivals Rio Tinto (LSE:RIO) and Glencore (LSE:GLEN) are up by similar amounts. 

China, a key customer for BHP’s iron ore, recently reported economic growth, or GDP, between July and September of 4.9%. That compares to UK GDP of 2.1% in August. For the first three months of 2020 under the coronavirus, China’s economy shrank by 6.8%. 

BHP’s petroleum production, accounting for under a tenth of adjusted profits, fell by 9% year-over-year, while metallurgical coal rose by 4%. Full-year production estimates for its portfolio of commodities were left largely unchanged. 

BHP has five major projects under development in petroleum, copper, iron ore and potash. In September, it published a report outlining its climate action and new climate commitments.

During its last financial year to the end of June, the company paid a total dividend of $1.20 per share, down on the 2019 ordinary dividend of $1.33 per share, and without a special dividend of $1.02 per share. 

First-half results are scheduled for 16 February. 

ii view:

BHP is focused on portfolio simplification, cash generation and cost discipline in order to deliver cash returns to shareholders. It is currently moving its coal portfolio to focus on higher-quality coking coals and is looking at options to exit New South Wales energy coal. 

Now, adding to the challenges of improving its day-to-day performance, it is also battling the Covid pandemic. Previous production guidance cuts, and a prior widening of estimates for the current 2021, underline the threat from the virus. Demand from impacted customer economies such as China, the US, Europe and India is firmly under watch. 

That said, industry lessons learned post the 2008 financial crisis should leave BHP better positioned to tackle the pandemic. China’s economic strength as it potentially emerges from the pandemic first, is significant. Just over half of group sales go to China. 

In all, some investor caution remains warranted as many economies now fight a second wave of coronavirus. However, with governments now more focused on balancing a health crisis against a financial crisis, and BHP shares sat on an estimated dividend yield of over 5%, higher risk income seekers may now find BHP appealing.

Positives

• Exposure to a diverse portfolio of commodities
• A focus on shareholder returns

Negatives

• Outlook uncertainty regarding Covid-19
• Trade tensions with China could increase – a key market for BHP

The average rating of stock market analysts:

Buy