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21-11-2014, 10:40 PM
Dividend promise squeezes BHP cashflow
THE AUSTRALIAN NOVEMBER 22, 2014 12:00AM
Barry FitzGerald
Resources Editor
Melbourne
Iron ore in the pits
Dividend promise squeezes BHP cashflowIron ore in the pits
SHARE price slumps forced by the collapse in key commodity prices have created a most unusual situation for major resources companies BHP Billiton and Rio Tinto — they have become yield plays in a low-yield world.
Yields from the pair do not match those of the banks, but at 4.4 per cent for BHP and 3.9 per cent for Rio (based on the most recent annual dividends, yesterday’s share price close and exchange rates), they are now not all that far behind.
Their current yields compare with a 2.8 per cent historic average, but it is not a badge of honour given the growth in yield simply reflects the sharp fall in their share prices of late, due primarily to the 48 per cent collapse in the iron ore price since the start of the year.
Traditionally, investment in the resources sector has been viewed as a capital growth story rather than an income story.
That it has taken the sharp fall in share prices to turn BHP and Rio into relatively high-yield plays is somewhat ironic, given the companies have been under the pump from investors for less investment and increased dividend payout ratios in the past couple of years.
But the bigger question now is that, given the severity of the iron ore price fall, and in BHP’s case the oil price slump, how sustainable are the dividend payments from the companies now that their free cashflows are being squeezed?
BHP’s annual dividend for 2014 of $US1.21 a share required a payout of more than $US6 billion ($6.9bn). What’s more, the company holds its “progressive’’ dividend policy to be sacrosanct.
It is a policy that seeks to steadily increase or at least maintain the dividend in US dollars at each half-yearly payment.
The growth in annual dividends from US26c in 2004 to $US1.21 a share for 2014 gives it a record that not even the global financial crisis messed with, as it did with Rio.
But the pressure is on because of the commodity price slump. A report by Credit Suisse found that, at current spot prices, BHP would need to pull some levers to ensure the sustainability of the progressive dividend strategy. It said BHP would need to bring its 2016 financial capital expenditure in at the bottom of the guidance range, implying few new project approvals. Alternatively it would need to bank $US4bn in asset sales (which now looks less likely given the failed sales process for Nickel West), or it would have to let net debt drift higher to $US30bn. One of the complicating factors for BHP — as its juggles its progressive dividend commitment against an insistence on maintaining a “solid A’’ credit rating throughout the commodities cycle — is that it is demerging a collection of assets into NewCo.
While second-rate compared with its four pillars of iron ore, petroleum, copper and coal, the assets in the new company are capable of generating free cashflow of an estimated $US500m, funds that BHP could have called to meet its progressive dividend commitment.
The company also said at the August announcement of the demerger that it would not be adjusting or rebasing the progressive dividend base to account for the lost free cashflow, further increasing the pressure to at least hold dividends in the face of lower commodity prices.
The pressure can be taken away by dropping the progressive dividend commitment. But that is not on the cards, judging by a statement by chief executive Andrew Mackenzie after the annual meeting in Adelaide this week.
“We run a progressive base dividend, and I’ve been speaking to the markets, and I think we’re very clear that in everything we’re able to do, and the levers we have, looking after the dividend is the No 1 imperative for the board. As things currently sit, we feel that the dividend at its current level is well covered.’’
Credit Suisse reckons that is the case at Rio, even if current spot commodity prices and exchange rates persist. “Our modelling says that Rio could still generate around $US1bn per annum of free cashflow post a rising dividend in FY210-2016.’’
THE AUSTRALIAN NOVEMBER 22, 2014 12:00AM
Barry FitzGerald
Resources Editor
Melbourne
Iron ore in the pits
Dividend promise squeezes BHP cashflowIron ore in the pits
SHARE price slumps forced by the collapse in key commodity prices have created a most unusual situation for major resources companies BHP Billiton and Rio Tinto — they have become yield plays in a low-yield world.
Yields from the pair do not match those of the banks, but at 4.4 per cent for BHP and 3.9 per cent for Rio (based on the most recent annual dividends, yesterday’s share price close and exchange rates), they are now not all that far behind.
Their current yields compare with a 2.8 per cent historic average, but it is not a badge of honour given the growth in yield simply reflects the sharp fall in their share prices of late, due primarily to the 48 per cent collapse in the iron ore price since the start of the year.
Traditionally, investment in the resources sector has been viewed as a capital growth story rather than an income story.
That it has taken the sharp fall in share prices to turn BHP and Rio into relatively high-yield plays is somewhat ironic, given the companies have been under the pump from investors for less investment and increased dividend payout ratios in the past couple of years.
But the bigger question now is that, given the severity of the iron ore price fall, and in BHP’s case the oil price slump, how sustainable are the dividend payments from the companies now that their free cashflows are being squeezed?
BHP’s annual dividend for 2014 of $US1.21 a share required a payout of more than $US6 billion ($6.9bn). What’s more, the company holds its “progressive’’ dividend policy to be sacrosanct.
It is a policy that seeks to steadily increase or at least maintain the dividend in US dollars at each half-yearly payment.
The growth in annual dividends from US26c in 2004 to $US1.21 a share for 2014 gives it a record that not even the global financial crisis messed with, as it did with Rio.
But the pressure is on because of the commodity price slump. A report by Credit Suisse found that, at current spot prices, BHP would need to pull some levers to ensure the sustainability of the progressive dividend strategy. It said BHP would need to bring its 2016 financial capital expenditure in at the bottom of the guidance range, implying few new project approvals. Alternatively it would need to bank $US4bn in asset sales (which now looks less likely given the failed sales process for Nickel West), or it would have to let net debt drift higher to $US30bn. One of the complicating factors for BHP — as its juggles its progressive dividend commitment against an insistence on maintaining a “solid A’’ credit rating throughout the commodities cycle — is that it is demerging a collection of assets into NewCo.
While second-rate compared with its four pillars of iron ore, petroleum, copper and coal, the assets in the new company are capable of generating free cashflow of an estimated $US500m, funds that BHP could have called to meet its progressive dividend commitment.
The company also said at the August announcement of the demerger that it would not be adjusting or rebasing the progressive dividend base to account for the lost free cashflow, further increasing the pressure to at least hold dividends in the face of lower commodity prices.
The pressure can be taken away by dropping the progressive dividend commitment. But that is not on the cards, judging by a statement by chief executive Andrew Mackenzie after the annual meeting in Adelaide this week.
“We run a progressive base dividend, and I’ve been speaking to the markets, and I think we’re very clear that in everything we’re able to do, and the levers we have, looking after the dividend is the No 1 imperative for the board. As things currently sit, we feel that the dividend at its current level is well covered.’’
Credit Suisse reckons that is the case at Rio, even if current spot commodity prices and exchange rates persist. “Our modelling says that Rio could still generate around $US1bn per annum of free cashflow post a rising dividend in FY210-2016.’’