Is BHP Billiton plc A Super Income Stock?

BHP Billiton

Despite being a highly volatile period for mining companies, BHP Billiton (LSE: BLT) (NYSE: BBL.US) has still managed to deliver share price growth of 56% during the last five years. Of course, this is below the gains posted by the FTSE 100 over the same period (which is up 74%) but is relatively strong, given the decline in metals prices and subdued demand experienced over the period.

Therefore, with the future being uncertain and the nature of BHP Billiton’s business being volatile, can it realistically be classed as a super income stock?

BHP Billiton’s profits have been highly volatile over the last five years, with pre-tax profit ranging from around £7 billion in 2009 to around £19 billion in 2011. Despite this, BHP Billiton has delivered steady dividend growth over the period, with dividends per share growing at an annualised rate of around 9%. This is highly impressive and, furthermore, BHP Billiton is forecast to deliver dividend per share growth in future, too.

Over the next two years, BHP Billiton is expected to increase dividends at an annualised rate of 5%. This is impressive and, while lower than the rate over the last five years, still beats inflation and is above the FTSE 100 average. Furthermore, BHP Billiton’s bottom line is set to return to growth in the current year, which means that the company can more easily justify (and afford) dividend per share growth.

On this topic, BHP Billiton’s current dividend appears to be very affordable. It is covered twice by net profit, so even if profit were to fall in future there is ample headroom for the company to make its dividend payments. Indeed, it could be argued that BHP Billiton should be paying out a higher proportion of earnings as a dividend, with its bottom-line returning to growth and the current dividend being so well covered. Doing so would mean a higher yield for shareholders.

However, that’s not to say that the current yield is not impressive. At 3.9% it is above the FTSE 100 average and, when combined with the promising dividend growth prospects as well as the scope to increase the proportion of earnings paid as a dividend, shows that BHP Billiton has a lot of potential as an income play. Therefore, it is a super income stock that looks all set for a strong performance in future.

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Peter owns shares in BHP Billiton.