by Clement Thibault
In yet another sign of the ongoing carnage that’s been following in the wake of the continuing commodities slump, yesterday, BHP Billiton (N:BHP), the world’s largest mining company, reported a loss of $5.7B for the first half of its financial year, down from a profit of $4.3B last year over the same period. That’s a $10B slip in profitability.
BHP operates a coal and metals division as well as a petroleum division which produces more than 250 million barrels of oil a year. Its total value currently stands at over $63B on the NYSE. The existing company is a result of the merger of UK-listed Billiton and Australia-based BHP back in 2001.
In response to the profits slide, BHP announced yesterday it will cut its interim dividend by 74%, from $0.62 to just $0.16, something it had recently said it would not do. While this move may seem drastic, particularly given what Australia's Sydney Morning Herald calls "the company's "progressive" dividend policy (which guaranteed dividends would never fall) had been abandoned," we believe it’s a wise decision.
The pressure on the company to address its dividend policy has been mounting over the past months. BHP hasn't reduced its dividend since 2001 and indeed, has been regularly increasing it, apart from a brief, stagnant period during the financial crisis of 2008.
However, the prolonged metals slump, combined with the recent oil collapse forced their hand. Last month, Standard & Poor’s downgraded the company’s rating from 'A+' to 'A', citing the current state of commodity prices. Additionally, the ratings firm acknowledged it would consider downgrading the company yet again if it fails to satisfactorily cut back on its dividend.
Analysts were expecting a cut of about 50%, which makes the actual dividend slash an even more prudent management decision. According to the Wall Street Journal, company representatives said, “The move would safeguard its balance sheet during what it expects will be a “prolonged” period of low commodity prices.”
Although this measure appears harsh, the company stated it strongly remains committed to cash returns to shareholders, and that the current cut in the dividend merely reflects the hardship the miner has gone through over the past few months. Cutting the dividend allows BHP to distribute a cash return totaling $858 million, covered by its free cash flow of $1.2B and maintain much needed flexibility going forward.
The dividend reduction shows that the company is willing to admit that contrary to earlier expectations, BHP has been more seriously effected by commodity prices than initially thought. It also shows that the company remains focused on the long-term health of its balance sheet and its business in general.
So what happens after this type of public ‘body blow’? In its press release announcing the cut, BHP stated that the current environment should create opportunities going forward, and that the company is in a position of strength, ready to take advantage of ongoing conditions.
This position of strength could mean the company is well situated to acquire struggling competitors, should their stock prices and market caps continue to fall over the coming months. Indeed, BHP's Chief Executive Officer Andrew Mackenzie said that:
..."[acquisitions] would clearly get preference relative to organic investments that could wait".
Investors have reacted to the bad news. The company's shares are currently down 3.4% in pre-market US trading, and as of this writing, down 4.3% in the UK (where it trades under the ticker (L:BLT)), currently pricing the stock at $24.44 and £760.6p, respectively.
The future of the commodity industry is uncertain given recent market conditions, but a few key acquisitions—perhaps copper and gold miner Freeport-McMoran (N:FCX), according to market speculation—could cement BHP's place as an industry leader.