What Are BHP Billiton plc’s Dividend Prospects Like Beyond 2014?

Today I am looking at mining colossus BHP Billiton‘s (LSE: BLT) (NYSE: BBL.US) dividend outlook past 2014.

A risky dividend selection

BHP Billiton boasts an impressive track record of keeping dividends rolling higher even in times of heavy earnings falls. Indeed, the firm has kept the payout rolling at a compound annual growth rate of 9.1% since 2009, even though constant pressure on commodity prices have prompted vast earnings drops during the period.

And City brokers expect BHP Billiton to hike the dividend for the 12 months ending June 2014 6.7% to 123.8 US cents, with an additional 6.2% advance forecast for the following year to 131.5 cents. These prospective payments create meaty yields of 4% and 4.2%, well above the 3.2% FTSE 100 forward average but down on a corresponding reading of 4.2% for the entire mining sector.

The City’s number crunchers expect dividend rises to be underpinned by a strong recovery in earnings, which are anticipated to surge 21% and 7% in 2014 and 2015 correspondingly. This in turn results in robust dividend coverage of 2.2 times predicted earnings, ahead of the generally-considered safety watermark of 2 times.

The picture is not quite as rosy as it would first appear, however, and investors should be alarmed at the rapidly deteriorating state of the firm’s balance sheet. Indeed, the company punched negative free cash flow of £2.1bn in 2013, swinging from a positive reading of £914m in the previous 12-month period.

Of course, the effect of weak commodity prices continues to weigh on the firm’s cash situation, an issue only partially mitigated by the firm’s extensive cost-cutting programme and plans to slash capital expenditure levels incrementally over the coming years. BHP Billiton confirmed in this week’s latest operational report that such outlay will ring in at $16.1bn this year, down substantially from $20.9bn in 2013.

However, the firm also highlighted the increasing problem of oversupply in natural resources markets and consequent problems for commodity prices. BHP Billiton reported that production levels hit record highs across three commodity classes during June-December, with output ramp-ups in Australia driving iron ore output alone to a record 98 million tonnes.

Indeed, Goldman Sachs reported in recent days that it expects the iron ore market to slip into a hefty surplus this year as production ramps up across the globe, and which is likely to worsen in 2015 — this market is responsible for 52% of the firm’s underlying earnings.

But with almost all commodity classes expected to experience gradually worsening supply/demand balances in coming years, a position which could take a hatchet to current earnings forecasts. I believe that the profits outlook for firms across the mining sector — as well as that of dividend growth — are likely to become cloudier in the years ahead.

Bolster your dividend income with the Fool

But whether or not you share my pessimistic take on BHP Billiton, I would strongly urge you to check out the Fool's latest wealth report which highlights how you can make a packet from investing in the best income stocks around.

This ALL NEW and EXCLUSIVE report, titled "How To Create Dividends For Life," lays out the golden rules on what to do -- and what not to do -- when loading up on dividend-paying shares. Click here now to download your copy; it's 100% free and comes with no further obligation.

> Royston does not own shares in BHP Billion.