11/11/2015 BHP Billiton is big, troubled, 'ludicrous' and worth buying | afr.com

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Nov 11 2015 at 1:33 PM   | Updated 20 mins ago    

BHP Billiton is big, troubled, 'ludicrous' and worth buying

  |SAVE ARTICLE   PRINT   REPRINTS & PERMISSIONS

by Jeremy Chunn

Investments are assessed on two criteria: risk and return. The world's biggest miner,

BHP Billiton, scores badly for both.

Its share price is down 37 per cent on a year ago and has been more volatile than the

S&P/ASX 200 benchmark for the past 10 years, when measured monthly.

The reason it is such a popular stock with Australians is hard to fathom, other than

that it is big and Australian.

As BHP's market value has been struck down, the dividend yield has shot up to levels

where it is "exceptionally high" at about 8 per cent, Prime Value Asset Management

joint chief investment officer ST Wong says.

4 reasons why BHP shares are tanking

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11/11/2015 BHP Billiton is big, troubled, 'ludicrous' and worth buying | afr.com

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LATEST STORIES

BHP

The obvious strategy is to buy the company at the bottom of the cycle, and Intelligent Investor has a "buy"recommendation on BHP. BHP Billiton

"The sustainability of 8 per cent yield on BHP is in some doubt," he says. "The

company is paying out too much dividends to shareholders at the expense of cash

flows."

The cost of remediation of the Samarco tailings dam in Brazil that burst last week,

estimated at more than $US1 billion ($1.42 billion) by Deutsche Bank (to be shared

with joint venture partner Vale, a Brazilian miner), is an unknown negative on

valuations.

Wong suggests the Samarco mine makes up about $3 of BHP's share price, which was

trading around $21 on Wednesday morning.

"In the short term BHP [and Vale] will need to raise cash to undertake remediation

work, and that will put more pressure on cash flow."

On Bloomberg data, the company is

expected to pay 192 per cent of profits as

dividends in 2014-15. In 2010-11 the payout

ratio was 23 per cent.

Intelligent Investor senior analyst Gaurav

Sodhi is clear with his warnings on the

stock. "No matter how good a miner it is,

it is still a cyclical business – and it

should be treated as a cyclical business,"

he says. "I wouldn't call this a stock you

should hold onto forever. It is not an

income stock, regardless of what

management tries to tell you."

ON THE BRIGHT SIDE

Some of the company fundamentals are

indisputably positive, however. BHP has

never made an operating loss, Sodhi says.

All past losses have come from mistakes

of capital allocation and have not been

RELATED QUOTES

BHP BLT FPO (BHP)

$20.95 0.62 2.87%

volume 12977648 value 273232687.0

5 YEARS 1 DAY

Minerals exploration, production and processing(particularly coal, iron ore, copper and manganeseore) and hydrocarbon exploration, production andrefining.

http://www.bhpbilliton.com/

Metals & Mining (151040)

ASIC 004028077

VIEW FULL QUOTE

Company Profile

May14Nov10 Nov15

25

30

35

40

22.609

43.044

Last updated: Wed Nov 11 2015  16:24:06

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11/11/2015 BHP Billiton is big, troubled, 'ludicrous' and worth buying | afr.com

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due to poor operating efforts. "Its mines

are probably the best in the world; it's a

collection of outstanding assets."

The obvious strategy is to buy the

company at the bottom of the cycle, and

Intelligent Investor has a "buy"

recommendation on BHP.

It's impossible to pick the bottom of a cycle, of course, and commodities prices may

have further to fall. Sodhi's tip is to "take nibbles" at the stock as the price drops.

"It's clear profits will fall," he says. "I'm certainly no commodities bull."

The iron ore, coal, petroleum and copper producer is generating more free cash flow

now than at any stage in the boom, he says. On the downside, its policy of constant

incremental dividend growth is "ludicrous".

If a company is cyclical, so too should be its dividend policy. "Management won't

acknowledge it, but it can't last."

He expects dividends to be partly funded with debt at some stage over the next two

years. "To sustain that dividend it will depend on how commodity prices go," he says.

"I would suggest that it probably won't be able to do so."

If the miner drops its progressive dividend policy, Wong says the share price may be

more resilient than expected. "I don't think the market would over-penalise

them because it would be partly in recognition that management is doing something

to make sure the balance sheet and cash flows are appropriately positioned."

Such a scenario would not be "outright negative", he says.

Wong holds BHP in the Prime Value Asset Management's high conviction Growth and

Opportunities funds.

ASX Announcements

10/11/15 Becoming a substantial holder

9/11/15 Update  Incident at Samarco

6/11/15 Incident at Samarco

5/11/15 Ceasing to be a substantial holder

23/10/15 BHP Billiton Plc 2015 AGMPresentation

VIEW ALL ANNOUNCEMENTS

11/11/2015 BHP Billiton is big, troubled, 'ludicrous' and worth buying | afr.com

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