BHP Billiton - all in a spin

BHP Billiton: The mining sector spent a decade re-shaping itself to reap the rewards of a Chinese inspired commodity boom. Mega deals were executed in a dash for size and reach, across continents and commodities. During this phase cash returns to shareholders were well down the list of priorities and many a capital expenditure programme was signed off in haste. However, Chinese economic growth has slowed leaving many commodity prices deflated and many mining company strategies in tatters. Many a Chief Executive has gone to be replaced by those tasked with tidying up and rationalising the store cupboards. In the case of BHP Billiton, it came into being as an Anglo-Australian dual listing in 2001 but Andrew MacKenzie has replaced Marius Kloppers as CEO and the corporate wheel has turned full circle. It has announced plans to hive off assets including aluminium, managanese, nickel, metallurgical coal and silver-lead-zinc mines into a ‘SpinCo’. In many respects this unpicks the earlier merger. One key point is that SpinCo will have its primary listing in Australia and no London listing, which will turn some mandate constrained holders into forced sellers. So what does this mean for income investors? Well for now it all seems to muddy the waters, with the demerger only slated to complete by the end of the first half of 2015. BHP Billiton has said that it will ‘seek to steadily increase or at least maintain the dividend per share in US dollar terms...implying a higher payout ratio’, which feels a bit lukewarm. For SpinCo, the only comment, at this early stage, is that it will ‘have the flexibility to consider a dividend policy that reflects its cash generating capacity’. With this announcement, we also had dull final results with the full year dividend up 4% to 121c (which doesn’t look great once you factor in sterling strength). On a 1950 p share price this is a yield of about 3¾%. Investors had been hoping that the new capital discipline sweeping the sector would see a share buy-back or special dividend announced but the SpinCo plan has put paid to that it seems. (The contrast to Glencore’s announcement of a $1bn buy-back is marked.) So there are now lots of spinning factors to consider and two dividend policies to try and nail down. My hunch is that both entities will give due focus to shareholder payouts but everyone is short on hard numbers and the SpinCo share price will have to weather any forced selling. Investing on hunches can work, but there is plenty of time between now and demerger for forecasts to become a lot clearer. (21st August 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk