Will BHP cut the dividend?
The recent credit rating downgrade from S&P wouldn’t come as a surprise, as there had been much talk that the mining giant required an iron ore price (which contributed 46% of EBIT in 1H15) of $85/t and oil (petroleum contributed 25% of 1H15 EBIT) of $70/bbl. to maintain it’s A-rating.
Providing these key commodities stay around current levels and BHP fails to alter its capital management, further downgrades seem enviable (especially given the ‘Big Australian’ is on negative credit watch) and this would not be taken well by those holding BHP’s equity. There is strong focus on whether BHP will cut its dividend from 62c in 1H15 this earning season and one suspects the dividend will be slashed. It may even by halved and the fact BHP yields 9% seems unsustainable.
It must be said that with gearing of 24% and net debt to EBITDA of 1.45X one could understand if BHP did leave the dividend unchanged. With such financial health one suspects that leaving the dividend unchanged would be a strong stamp of confidence and the shares should rally, but this is presumptuous and many feel that the dividend has to be cut at some stage, so why wait? Clarity is key.
Other key considerations for the market:
- Guidance for 2016 capital expenditure (CAPEX) stands at $8.3 billion, but there is clear scope for this number to be reduced. In fact, given the level of free cash flow generated (at current spot prices), its CAPEX commitments when aggregated with the current dividend payout is probably unsustainable without another ratings downgrade
- Will there be further write-downs to asset value, notably to its US onshore assets? BHP only recently announced write-downs here, but again there is scope for more
- Any views around further production levels in its petroleum division
- Catalysts for future growth projects
- Update on Samarco legal costs
- Hints of an equity raising. This is a low probability, but a raising is certainly on the radar
Consensus expectations for 1H16 earnings (these are the numbers which traders will immediately key off):
- Revenue – $15.94 billion (-46% YoY)
- EBITDA – $6.14 billion (-57%)
- Underlying NPAT – $750.6 (-84%)
- Net operating cash flow – No consensus on this metric, but the figure is likely to be less than $5 billion ($10.324 billion pcp)
- Net debt – $26.47 billion
BHP is not the most consistent performer when it comes to beating the streets’ expectations for revenue or NPAT. As a rule, investors and traders will naturally have far more confidence around holding during earnings season if the company consistently beats expectations. In five of the last eight half-yearly reports BHP has missed revenue and EPS expectations. The average move on the day has been 2.1%, so we can always expect good volatility.