No Cash Return For BHP Billiton plc Shareholders (But It’s Still A Buy For Me)

BHP Billiton (LSE: BLT) (NYSE: BBL.US) shares fell by more than 4% this morning, after the mining giant poured cold water on investors’ hopes of a cash return, following its planned demerger.

BHP is going to spin-off a number of its non-core assets into a new company, so that the firm can focus on its largest and most profitable operations — those in iron ore, petroleum, copper, coal and, potentially, potash.

BHP shareholders will be issued with shares in the new company, which will contain BHP’s aluminium, manganese, nickel and silver-lead-zinc operations, plus certain parts of its coal business.

Unfortunately for UK shareholders, the new company — so far referred to as NewCo by BHP — will be listed on the Australian Securities Exchange, with a secondary listing in South Africa, and an American Depository receipt (ADR) programme.

In other words, UK shareholders will be issued with overseas shares of some kind, making them more costly to sell, and less attractive to own, for many shareholders.

What about cash?

There was widespread speculation (including by me) that this deal might involve the partial sale of the NewCo business, and a cash return to BHP shareholders.  

BHP appears to have ruled out this option — perhaps because it couldn’t find enough major new investors for NewCo, which analysts estimate may have a market capitalisation of around $15bn.

However, BHP has committed to continue to maintain or increase its existing dividend, meaning that income investors won’t see any loss of income as a result of the demerger.

Is BHP still a buy?

Today’s news is disappointing for investors, as were the firm’s full-year results, which were also published this morning. Earnings were slightly below expectations, with underlying earnings of $2.52 per share, against consensus forecasts of $2.61 per share.

However, I don’t believe shareholders should be worried, as BHP’s operating profits rose by 11.5% to $23.4bn last year, while the firm’s dividend was hiked by 4.3% to $1.21 per share (approx. 72p).

BHP says that its core portfolio, which will remain after the demerger, generated 96% of underlying operating profits this year, and would have delivered an impressive underlying operating margin of 42%.

In my view, BHP shares remain a strong buy for income, with a yield of 3.6%, and a free option — via the NewCo shares — on any future gains from the demerged assets.