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Is it wise to invest in mega-miner BHP Billiton right now?

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On paper, mega-miner BHP Billiton  (LSE: BLT) looks like the perfect stock with an attractive showing on the normal indicators for quality, value and momentum. On top of that, in the full-year results today, the directors declared a total dividend for 2018 of 118 US cents per share, which puts the dividend yield at a chunky 5.6% with the current share price at 1,633p or so. What is there to not like? Read on and I’ll pitch a few negatives for you to consider.

Great figures

The trading outcome for 2018 was a good one. Underlying profit from continuing operations rose 33% compared to the previous year and net debt fell 33% to just under $11bn. Some $12.5bn of free cash flowed into the firm’s coffers, which it puts down to higher commodity prices during the period and a strong operating performance. The directors designed this year’s bumper dividend to reflect the firm’s strong trading.

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During the period, the directors announced their intention to sell the firm’s onshore oil assets in the US, which will raise around $10.8bn to be returned to shareholders. It’s all part of the what has been the company’s plan to reduce operations to a “dramatically simplified portfolio of tier one assets.” Chief executive Andrew Mackenzie said in today’s report that he sees this year’s strong momentum” continuing in the medium term “as our leadership, technology and culture drive further increases in productivity, value and returns.”

I can’t argue with its recent financial record. Earnings and cash flow have increased steadily each year since bottoming in 2016 and the share price has responded well, rising around 150% since the nadir of its January 2016 dip. But that’s part of the problem that I see with this stock. BHP Billiton is an out-and-out cyclical operation with its fortunes almost completely at the mercy of commodity prices that are out of the firm’s control. So, if you are thinking of investing in the firm now, I reckon it would be wise to consider where commodity prices are likely to move from here.

This dividend looks vulnerable to me

In the year to 30 June, the firm earned around 43% of its continuing earnings before interest and tax (EBIT) from iron ore, 26% from copper, 22% from coal and 9% from its remaining petroleum operations. If those commodities plunge, so will the firm’s earnings and cash flow. I wouldn’t treat the stock as a dividend-led investment because there’s no safety net in that approach. The dividend policy provides for a minimum 50% payout of “underlying attributable profit at every reporting period.” If the underlying profit vanishes because of depressed commodity prices, the dividend will follow.

The firm just delivered a bit of a mixed bag in terms of the outlook for the world’s economies. To me, it looks like the worldwide economic cycle is mature and BHP Billiton’s big recent profits seem to bolster that view. I reckon it’s risky to hold shares in this firm and the other big London-listed mining companies now, so I’m avoiding the stock.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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