The mining sector has had a rather disappointing time over the last couple of years, with shares in many of the majors treading water since 2011 and missing out, to a large degree, on the share price gains seen in the wider index in 2013.
However, that lack of performance could mean that shares in BHP Billiton (LSE: BLT) (NYSE: BBL.US), for instance, are cheap at current levels and have the potential to trade up to 25% higher at 2,400p.
Indeed despite being a growth stock, BHP Billiton now seems to also tick the ‘income box’ too. It currently yields just over 4% and this is rather strange when the fact that the FTSE 100 yields 3.5% is taken into account.
In other words, BHP Billiton offers a yield that is 14% better than the index yield despite offering far superior growth prospects.
Furthermore, it is the norm for growth stocks to have a yield that is less (often far less) than that of the index. So, given BHP Billiton’s impressive earnings per share (EPS) growth prospects for the next year (EPS is expected to grow by 20% in just one year) it is entirely reasonable to assume that its shares should yield a lower amount than the wider index.
Indeed, a yield that is 10% lower than the current index yield of 3.5% seems fair. Were BHP Billiton to trade on such a yield (i.e. 3.2%) its shares would be priced at 2,400p. That is just over 25% higher than their current level and such gains seem to be a reasonable aim, since a discount of 10% to the index yield is not a particularly aggressive assumption to make.
In addition, it’s not as though BHP Billiton is pushing itself to make generous dividend payments. Dividends are forecast to be covered 2.15 times by next year’s earnings. This shows that higher dividends per share are entirely possible, should management decide that is how they wish to allocate their considerable free cash flow.
Indeed, were BHP Billiton’s management to pay out a higher proportion of earnings as a dividend, it could mean that shares not only offer a more generous yield but also merit a higher share price than the 2400p previously mentioned.
Either way, it seems that BHP Billiton is much more than just a growth stock – it’s an income stock with considerable upside potential.
> Peter owns shares in BHP Billiton.