Should I go for BHP Group’s 6% dividend yield, or is caution needed?

Am I nuts to even question the sustainability of BHP Group plc’s (LON: BHP) juicy dividend yield?

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Mega-miner BHP Group (LSE: BHP) pops up when I screen for big-cap firms with large dividend yields. Should I pile into the shares to collect that income, or is caution warranted?

What I’m after is a reliable dividend with staying power that rises a bit each year. However, looking back at the stock’s history, I’m concerned about the wild swings the BHP Group’s share price has delivered in recent years.

Volatility assured

In 2008, the share traded below 800p but it went higher than 2,200p during 2011. Then, in 2016, it plunged below 700p before climbing above 1,900p, where it is today. That’s a lot of volatility and I’m worried that if I catch one of the peaks, my investment could plunge. Admittedly, there has always been a bounce back up again in the past, but there are no guarantees that would happen next time.

Of course, the share-price action reflects the cyclicality inherent in the underlying business. Mining for resources and drilling for oil is one of the most volatile sectors a company could operate in, and a lot of the trading outcome each year depends on the prevailing selling prices of commodities, which is outside BHP’s control and dependent on macroeconomic variables.

The recent record for earnings and for the dividend looks like this:

Year to June

2013

2014

2015

2016

2017

2018

Dividend per share ($)

0.57

1.25

1.29

0.29

0.85

1.18

Normalised earnings per share ($)

2.09

2.54

1.35

(0.18)

1.21

1.68

The table doesn’t reassure me at all. Both the dividend and earnings have been as volatile as the share price. That’s not what I’m looking for with a dividend-led investment. Normally, I’d want earnings and the dividend to rise a little each year, but that big dip in the figures for 2016 more or less syncs with the great plunge we saw in the share price.

What about the situation with cash flow and borrowings, do they provide some solace?

Year to June

2013

2014

2015

2016

2017

2018

Operating cash flow per share ($)

3.77

4.74

3.62

2.00

3.15

3.46

Net debt (£m)

27,349

25,699

24,334

25,981

16,290

10,916

Focused on debt-reduction

The incoming cash flow took a dive in 2016 too – everything went down together! However, there’s been great progress with the level of net debt falling, which appears to be more to do with building cash on the balance sheet rather than the absolute reduction of borrowings.

But with February’s half-year report the company said it’s focusing on debt-reduction. Gross debt stood close to $25.5bn at the end of December 2018, down almost 5% over six months.

I reckon it’s important for cyclical outfits such as BHP to pay down debt during the good times. If commodity prices cycle down into another big dip taking the firm’s profits lower too, the net cash position could soon disappear. And right now, I reckon the share price looks higher than it’s been for a while.

Just as the price has always bounced back from the dips, it has always fallen away from the peaks as well. BHP’s operations are just too volatile for me to consider the share for its dividend income, so I’m staying away for the time being.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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