ii view: mining mammoth BHP hikes dividend by 55%

An industry giant with exposure to China and a forecast dividend yield of over 5%. Buy, sell or hold?

First-half results to 31 December

• Underlying profit rose by 16% to $6.04 billion
• Interim dividend up 55% to US $1.01 per share
• Net debt down 7% to $11.8 billion

Chief executive Mike Henry said:

"BHP has delivered a strong set of results for the first half of the 2021 financial year. Our continued delivery of reliable operational performance during the half supported record production at Western Australia Iron Ore and record concentrator throughput at Escondida. 

“Creating and securing more options in future facing commodities remains a priority. In nickel and copper, we established further new partnerships, acquired new tenements and progressed exploration.

“Our outlook for global economic growth and commodity demand remains positive, with policymakers in key economies signalling a durable commitment to growth and signalling ambitions to tackle climate change. These factors, combined with population growth and rising living standards, are expected to drive continuing growth in demand for energy, metals and fertilisers.”

ii round-up:

Mining giant BHP (LSE:BHP) hiked its dividend payment by 55% to $1.01 per share as China's economic recovery and hopes for the rollout of vaccines boosted metal prices.

Underlying profit rose by 16% to $6.04 billion, aided by higher iron ore and copper prices, record Australian iron ore production and stringent cost control. BHP has now made more than $30 billion of shareholder returns via dividends and buybacks over the last three years.

BHP shares rose by more than 1.5% in UK trading. As with major mining rival Rio Tinto (LSE:RIO), BHP shares have doubled since March induced pandemic lows. Mined commodities such as iron ore and copper are up by more than 80% since late March.

China, a key customer for BHP’s iron ore, recently reported economic growth or GDP of 6.5% for the final quarter of 2020. That compares to a fall of 6.8% in the first quarter, when coronavirus was at its most disruptive for the world’s second biggest economy. 

Iron ore generates around three-fifths of overall BHP adjusted profits and copper a further quarter. A stronger Australian dollar, planned maintenance and adverse weather all hindered the performance. 

A total hit of $436 million due to Covid-19 on its operations was flagged, caused by a combination of lower production volumes and additional direct costs, given increased social distancing measures.

Net debt for the Melbourne headquartered company fell by nearly $1 billion from late 2019 thanks to strong free cash flow generation. The dividend payment declared is roughly equal to free cash flow generated during the period and equates to an 85% payout ratio, comfortably ahead of its 50% minimum payout policy. A total dividend of $1.20 per share was made over the previous financial year versus $2.35 per share in 2019 and including a special dividend. 

At the end of the first half, BHP had four major projects under development in petroleum, iron ore and potash with a combined budget of $8.5 billion over the life of the projects.

Management is now committed to reducing emissions across its operations and to achieving net zero operational emissions by 2050. Climate change is now part of its corporate strategy and is assessed under portfolio decisions. 

ii view:

BHP is focused on portfolio simplification, cash generation and cost discipline in order to deliver cash returns to shareholders. It is currently adjusting its coal portfolio to focus on higher-quality coking coals under climate change strategy. It is also making good progress on implementing autonomous trucks across its Australian iron ore and coal mine sites.

Accompanying outlook comments pointed to a world economy 4.5% smaller during 2021 than it would have been if the virus had not occurred. That is 1.5% better than the company expected six months ago. The difference reflects the speed of the rebound in ex-China markets led by India and the US, plus additional stimulus measures in developed countries.

For investors, ongoing Covid uncertainty and wider worries about excessive credit in China should not be overlooked. However, lessons learned following the 2008 financial crisis look to have left BHP better positioned to tackle the pandemic. What's more, China’s economic strength remains significant and important, with over half of group sales heading to China. A bumper increase in this latest dividend and a forecast dividend yield of over 5% is also highly attractive to income seekers. In all, and while some caution remains sensible, BHP remains a play on further global economic recovery. 

Positives

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

Negatives

• Outlook uncertainty regarding Covid-19
• US China trade tensions still persist

The average rating of stock market analysts:

Strong hold