Does BHP Billiton's dividend pass the test?
In the dividend report card series, we analyse financial metrics to begin answering the following questions about a company's dividend:
1. Over time, has this company steadily increased its payouts?
2. How sustainable is the dividend?
3. Does the company have room to further increase the dividend?
For a full explanation of each category, click here for a tutorial.
Today's pupil is BHP Billiton (LSE: BLT), which has a 3% expected yield.
Dividend history
| Metric | 5-Year
Annualised
Growth Rate |
|---|
| Dividend per share | 21.4% |
| Diluted earnings per share | 15.9% |
Source: Capital IQ, as of 29 July 2010
BHP Billiton has done a nice job raising its dividend at a rate comparable to earnings growth. This is an ideal pattern because it not only shows that the company has rewarded shareholders in the past, but that it expects strong profitability in the future, as well.
Sustainability
| Metric | Trailing
12 Months | Final
Grade
Weighting | Report Card
Score
(out of 5) |
|---|
| Interest coverage | 31.6 times | 10% | 5 |
| EPS payout ratio | 48.6% | 10% | 5 |
| FCFE payout ratio | >100% | 30% | 1 |
Source: Capital IQ, as of 29 July 2010.
BHP produces more than enough profit to satisfy both its creditors and sustain its dividend, but free cash flow fell off sharply in 2009 as a result of declining profitability (versus 2008) and increased investments.
The good news is this might have simply been due to the cyclicality of BHP's business. In fact, in 2007 and 2008, BHP generated more than enough free cash flow to cover its dividend and would have scored "5" and "4" in that category, respectively.
Investors should keep an eye on the company's free cash flow coverage in coming years, but the fact that it scored a "1" during an awkward time in the markets isn't necessarily cause for panic.
Growth
| Metric | Trailing
12 Months | Final
Grade
Weighting | Report Card
Score
(out of 5) |
|---|
| EPS payout ratio | 48.6% | 10% | 4 |
| FCFE payout ratio | >100% | 20% | 1 |
| Sustainable growth rate | 11.7% | 10% | 5 |
Once again, BHP scores low by the free cash flow measure in this period, but the other factors in this category look to be strong. As long as the free cash flow figure works itself out over time, it appears BHP is quite capable of growing its dividend at a good rate over the next five years or so.
Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against its direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.
BHP Billiton's 3% yield is slightly above its competitors, but there's a reason for that -- unlike the rest of these names, BHP never cut or suspended its dividend in the past few years.
That's been fantastic news for its shareholders, but all the dividend cuts and suspensions in the industry are a stark reminder that mining and exploration isn't an easy business and when times get tough the dividend is often called into question.
Pencils down!
With all the numbers in, here's how BHP Billiton's dividend scored:
| Weighting | Category | Final Grade |
|---|
| 10% | History | 5 |
| | Sustainability | |
| 10% | Interest Coverage | 5 |
| 10% | EPS Payout Ratio | 5 |
| 30% | FCFE Payout Ratio | 1 |
| | Growth | |
| 10% | EPS Payout Ratio | 4 |
| 20% | FCFE Payout Ratio | 1 |
| 10% | Sustainable growth | 5 |
| 100% | Total Score
(out of 5) | 2.9 |
| | Final Grade | C |
A "C" isn't a fantastic grade, but it may not be as bad as it seems. If BHP can resume strong free cash flow generation in coming quarters, the dividend could easily score a "B" or an "A" down the road.
We'll check back to see how they're doing after a few more reports come in.
Previous dividend report cards:
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