BHP Billiton (LSE: BLT) (NYSE: BBL.US), the world’s largest diversified miner, released its results for the half year to 31 December 2014 overnight, the last set of results before the company spins off unwanted assets.
The company’s profits for the first half fell by as much as 47%, as the prices of key commodities slumped. As a result, management has said that the group will cut capital spending by a further 15% this year, to $12.6bn and to $10.8bn next year, compared to the figure of $13bn previously outlined.
But there was also plenty of good news in the results release. Net debt during the period fell to $24.9bn, down by $847m compared to the year-ago period. Group free cash flow rose to $4.1bn, despite the hostile pricing environment and the group managed to achieve productivity savings of $2.4bn during the period.
Further, BHP’s cost of production dropped across all of the group’s key asset classes.
Cash costs of production fell by 29% for Western Australia Iron Ore, 15% for Queensland Coal, 13% at the Escondida copper mine and 8% for onshore US oil production.
With costs falling, a strong balance sheet and robust free cash flow, BHP was able to announce a 5% increase in its interim dividend payout to $0.62 per share, despite falling profits. BHP’s dividend yield currently stands at 5.1%. The company’s payout ratio is just over 60%.
Tough times ahead
BHP’s results for the first half of the year were better than many analysts had expected, but the company’s not out of the woods just yet.
Indeed, the prices of key commodities continue to fall — last night, the price of iron ore hit a new six-year low — and BHP may find itself having to make deeper cost cuts later this year in order to remain competitive.
Nevertheless, BHP’s chief executive Andrew Mackenzie doesn’t seem to be worried about the company’s future:
“We remain confident about the outlook for our company. We have the best quality assets and operating capability, a deep understanding of global markets, a portfolio of very high-return growth projects…”
And in many respects investors shouldn’t be worried either. BHP has some of the lowest production costs in the industry. Additionally, the miner’s strong balance sheet — gearing fell to 22.4% during the six months to 31 December — gives it plenty of flexibility.
Maintaining a strong balance sheet and attractive, adequately covered dividend payout are two key priorities for the company and its management.
Having said all of the above, there is a certain amount of uncertainty surrounding BHP’s future. For example, if commodity prices continue to fall, while BHP is in a better position than most to weather the declines, the company’s income will still come under pressure.
With that in mind, if you are thinking about buying BHP, you need to be prepared for volatility. Despite BHP’s attractive dividend yield of 5.1% the company is a risky play. If the group’s income falls further, BHP could have no choice but to cut the dividend payout.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.