BHP Billiton is a diversified natural resources company founded in 1996 following a merger between of Australian Broken Hill Proprietary Company Limited (BHP) and Anglo-Dutch Billiton Plc.
In terms of what BHP Billiton is actually digging out of the earth, it puts the breakdown at four-tenths iron ore, two-tenths oil and gas, another two-tenths copper, one-tenth coke and coal and the last tenth is made up of diamonds and anything else.
The group sells about two-thirds of its commodities to markets outside Europe and the USA. Some 28 per cent of its product is secured by China, 14 per cent by Japan and the same again by other parts of Asia.
Over the longer term, BHP Billiton expect strong demand for its core commodities to be underpinned by the industrialisation and urbanisation of China, India and other emerging economies. Progressively higher cost sources of new supply will be required, supporting long run commodity prices and operating margins for the low cost producers.
The company wants to maintain a disciplined approach to dividend payments and does not want to start over-distributing only to run into problems in years to come about how sustainable its pay-out rate is.
I suspect it will be reinforcing the idea of linking dividend growth to its tonnage volume growth so it can maintain a progressive payout. To keep its volumes up it will have to deploy capital to increase production, so acquisitions, other than strategic or opportunistic ones, are unlikely to be central to its strategy.
Dividends must have been paid long enough for several cycles of share price undervalue and overvalue to be established, in order that extremes of high and low dividend yield can be observed.
The Value Table shows the dividend yields at which a company’s share price is at historic undervalue levels – low share price (LoPr) with high yield (Hyld%) – as well as at historic overvalue levels – high share price (HiPr) with low yield (Loyld%).
Share prices are Undervalued or Overvalued when they are within a ten per cent range of their historic levels of high dividend yield (Hyld%) or low dividend yield (Loyld%).
The numbers in the share price columns (LoPr and HiPr) are the equivalent share prices to the dividend yields shown in the respective undervalued and overvalued dividend yield columns.
The color coding in the Status (‘S’) column of the table indicates the current share price valuation of the company. The column will be green when the company is historically undervalued, orange when the company is historically overvalued and white when the company is trading between historically undervalued and overvalued.
Share prices are Undervalued (Green) or Overvalued (Orange) in the Yield Chart when they are within a ten per cent range of their historic levels of high or low dividend yield.
Highs (Blue) and Lows (Red) are shown based on the monthly high and low share prices.
To reduce the period under consideration drag to the right the “slider” below the chart.
From the years collated BHP Billiton has a track record of:
A long period of uninterrupted dividends will show us how companies and their management teams have performed going through several business and economic cycles.
Dividend growth is the hallmark of a high quality company. Dividends will not be maintained or raised if future earnings are in doubt.
A company that is making profitable progress should be able to boost its dividend by 7.5% or more at least five times in a 12-year period.
Compound Annual Growth Rate
For illustration purposes, we show the 5 year dividend CAGR and 12 year dividend CAGR for BHP Billiton:
Note: CAGR is a pro forma number that provides a “smoothed” annual yield, so it can give the illusion that there is a steady dividend growth rate even when the annual dividend increases can vary significantly.
CAGR is used as a measure to evaluate how well one dividend paying company performed against other dividend paying companies in the same sector.
We are particularly interested in companies with a dividend CAGR of 8 per cent or higher for both the most recent five and twelve year periods.
The Financial Strength of a company is a weighted composite score of quantitatively analysed metrics taken from the Balance Sheet, Income Statement and Cash Flow Statement.
The top score is an 8. A score of 7 and above is considered to be financially strong. A score of 5 and above is considered to be financially okay. A score of 3 and above is considered to be financially poor. A score of below 3 is considered to be a bankruptcy possibility.
Steven Dotsch, the managing editor of Dividend Income Investor.com, owns shares in BHP via the Dividend Income Portfolio.