Over the past few years, BHP Billiton (LSE: BLT) has undergone a stunning transformation. Back in 2015, the company was struggling with rising debt and falling commodity prices, a toxic combination which forced management into action.
Its quick thinking has stabilised the ship and, today, the business is, in my opinion, one of the best income stocks in the FTSE 100.
Blue chip income
The primary reason why BHP has become a leading income play in my eyes is the company’s cash generation. By slashing costs and investing in productivity rather than new, expensive capital projects, management has pushed costs down, production up, and margins have expanded.
The firm’s results for the year to the end of June show clearly just how far the company has come in a few years. Free cash flow for the period totalled $12.5bn and operating cash flow came in at $18.5bn. Considering these numbers, it’s no surprise the stock has outperformed the FTSE 100 by 24%, excluding dividends, over the past 12 months.
Alongside the full-year results, the board affirmed a record final dividend of $0.63 per share and the company is also promising to return any proceeds received from the sale of its US onshore oil assets (sale price $10.8bn) to investors. On the debt front at the end of June, BHP’s net debt had fallen to just $10.9bn, down a staggering $15bn in two years.
Any business that can both slash net debt by more than 50% while at the same time investing in operations and paying out billions to investors is worth a second look in my opinion.
But what does the future hold for the company’s distribution to shareholders? Well, analysts believe the payout will rise 11% to a new record of $1.31 (101p) for 2018, giving a dividend yield of just under 6%. This is excluding any additional capital return from the $10.8bn oil asset sale. If management does decide to return all of this cash to investors, according to my figures, the special dividend will be equivalent to 9% of the stock’s current market value.
All in all, this income champion certainly looks as if it deserves further research.
The fortunes of BHP’s peer, Glencore (LSE: GLEN), have also improved since the company’s shares plunged to an all-time low at the beginning of 2016. Quick thinking by management helped stabilise the group’s balance sheet and recovering commodity prices have acted as a tailwind for growth.
After plunging to a loss of $5bn in 2015, analysts are forecasting a net profit figure of $7.2bn by 2018, giving earnings per share of 37p. At this level, the stock is trading at a forward P/E of 8.8.
And when it comes to dividend growth, Glencore is a much more attractive proposition than its larger peer. Analysts estimate the full-year payout will jump 109% in 2018, giving a prospective dividend yield of 4.8%. Further growth is expected for 2019. Analysts have the yield rising to 5.3% next year.
Dividends are only part of the shareholder return proposition with Glencore. The company is also returning cash to investors via share buybacks. When you include these in the total yield — the total per share sum of both dividend income and buybacks, which acts as a proxy for total shareholder return — Glencore’s total yield is currently 5% and could, according to my calculations, hit 6% next year.
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Rupert Hargreaves owns no share 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.