What Dividend Hunters Need To Know About BHP Billiton plc

Today I am looking at whether BHP Billiton (LSE: BLT) (NYSE: BBL.US) is an appealing pick for those seeking chunky dividend income.

A dedicated dividend play

Although BHP Billiton has seen earnings fluctuate wildly since fiscal 2009 — the firm has punched heavy earnings falls in three of the past five years — it has remained committed to lifting the full-year dividend during this time. Indeed, the company raised the dividend for the year concluding June 2013 by 3.6%, to 116 US cents, even as earnings rattled 31% lower.

And City brokers expect the company to maintain its progressive dividend programme during the medium term at least. Current BHP Billitonforecasts point to a 6.2% rise for 2014, to 123.2 US cents, with an additional 4.4% increase anticipated next year to 128.6 cents.

These projections create meaty yields of 3.8% and 4% for 2014 and 2015 respectively, far ahead of the FTSE 100 forward average of 3.2%.

Commodity markets set to remain fragile

And City forecasters expect a solid earnings turnaround to support dividend growth. Forecasts point to a robust 21% earnings improvement this year, in turn providing dividend coverage of 2.2 times prospective earnings, comfortably within the widely regarded security benchmark above 2 times. Although earnings are expected to stagnate in 2015, dividend coverage still registers at a healthy 2.1 times.

Against this backdrop of sustained revenues pressure, BHP Billiton is significantly scaling back capital expenditure — the firm is on course to cut capital and exploration spend by 25% this year alone, it advised last month — as well as divesting non-core assets and initiating a massive expense-slashing drive. Indeed, the business is aiming to raise volume and cost efficiencies to $5.5bn for 2014, up from $4.9bn last year.

Although BHP Billiton has been hugely successful in installing cost-discipline across the group, the prospect of declining commodity prices raise fears over whether the firm can keep dividends rolling higher over the long-term, particularly as the firm’s cash pile is deteriorating rapidly.

Indeed, a backcloth of oversupply across many of BHP Billiton’s commodity markets looks set to keep the dampeners on prices, with the rate of new capacity hitting the market predicted to swamp supply.

For iron ore in particular — from where the mining giant sources more than half of all profits — Bank of America-Merrill Lynch expects prices to fall from $135 per tonne to $110 this year, before slumping to $105 and $100 in 2015 and 2016 respectively.

Given this worrying price picture, I believe that BHP Billiton could find it increasingly difficult to keep earnings ticking solidly higher in coming years, and with it shareholder payouts.

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Royston does not own shares in BHP Billiton.