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11/11/2015 BHP Billiton is big, troubled, 'ludicrous' and worth buying | afr.com
http://www.afr.com/personalfinance/bhpbillitonisbigtroubledludicrousandworthbuying20151111gkw5b9 1/4
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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
http://www.afr.com/personalfinance/bhpbillitonisbigtroubledludicrousandworthbuying20151111gkw5b9 2/4
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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
http://www.afr.com/personalfinance/bhpbillitonisbigtroubledludicrousandworthbuying20151111gkw5b9 3/4
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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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