How To Get 7% From BHP Billiton plc

If you buy shares in BHP Billiton (LSE: BLT) (NYSE: BBL.US) today then the forward yield is around 4%. But analysts at brokers Jeffries reckon that imminent share buy-backs will boost the capital return to a stonking 7%. That certainly beats putting your money in a deposit account!

Share buy-backs are, after all, just a different way for companies to boost shareholder returns. And the big miners have, over the past 12 months, come very much on the radar of dividend-seekers. What matters is whether the new higher yields that mining companies are now paying can be sustained.

That shouldn’t just be taken for granted. A recent report from consultants PwC suggested that dividends from the world’s top 40 miners could be at risk as the industry wrestles with softening demand from China, the world’s biggest market. Pick your mining investments with care!

BHP BillitonRetrenchment

For BHP, there’s a medium-term story and a long-term story. Right now, it’s one of retrenchment. BHP has slashed operating costs, cut back on capital expenditure, and sold off some non-core assets.

But this could just be the beginning. The company has hinted that it might spin off all of the assets that came from the BHP side of the business when it merged with Billiton in 2001. That’s how far the mind set of miners’ CEOs has shifted, from ‘bigger is better’ to today’s emphasis on profitability, cash conservation and shareholder returns. BHP has been so successful that analysts expect it to launch a share buy-back programme.


Longer term, BHP’s CEO Andrew Mackenzie is focusing on four ‘pillars’ of iron ore (50% of last year’s profits), coal, petroleum and copper — with a possible fifth in potash. Iron ore prices have plummeted as additional capacity has come on-stream at the same time as Chinese demand dropped. But BHP has world-class, low-cost assets and should weather the cycle better than most. Mr Mackenzie doesn’t see demand for steel dropping off a cliff, saying “China’s urbanisation has a long way to run”.

He’s also preparing for a shift in China’s economy from investment and construction to consumption. That means more new investment will be ploughed into metals with consumer uses such as copper. It could also expand the market for BHP’s potash assets, whose use in fertilisers is a play on the need to feed an ever-growing world population with an increasing appetite for a protein-rich diet. That, and petroleum, gives BHP a distinctive diversification.

Rio Tinto (LSE: RIO) (NYSE: RIO.US) is less diversified and even more dependent on iron ore. But it too has world-class assets, with cost cutting, capex reductions and assets sales to see it through the current down-cycle in prices. It’s also yielding 4%.

A good time to buy?

I’ve been buying BHP and Rio on dips, happy to tuck away stocks at that yield. These companies won’t see any dramatic re-rating for some years, but it could make sense to buy into BHP before its results are announced in August. That’s the most likely time for it to launch a share buy-back programme.

Just reinvesting dividends at that level makes a serious difference. Over a long period, reinvested dividends can easily add more to the growth of your portfolio than share price increases.

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Tony owns shares in BHP and Rio.