A Closer Look at BHP Billiton's Dividend Potential

LONDON -- Dividend income accounts for about two-thirds of total returns -- the actual rate of return, taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of BHP Billiton and assessing whether the company is an appetizing pick for income investors.

How does BHP Billiton's dividend history stack up?

 Metric

2009

2010

2011

2012

FY dividend per share

$0.82

$0.87

$1.01

$1.12

DPS growth

17.1%

6.1%

16.1%

10.9%

Dividend cover

2.4

2.6

3.9

2.9


Source: BHP Billiton company accounts.

BHP Billiton has managed to keep dividends rolling higher in recent years, even in times of severe earnings pressure -- dividend hikes in 2009 and 2012 came despite respective earnings-per-share declines of 30% and 18% for those years.

Dividend rises have been relentless, if erratic, while a mix of earnings volatility has also seen dividend cover subsequently shake during the period. However, coverage has still remained above the security benchmark of two times prospective earnings.

What are BHP Billiton's dividends expected to do?

Metric 

2013

2014

FY dividend per share

$1.10

$1.25

DPS growth

(1.8%)

13.6%

Dividend cover

2.1

2.2

Dividend yield

3.8%

4.3%

Source: Digital Look. Exchange rate: £1=$1.51889.

City analysts are expecting a 29% EPS slide for the year ending June 2013 to be accompanied by a slight drop in the annual dividend. However, an anticipated 25% earnings snapback in 2014 will result in a strong resumption of dividend growth, according to estimates.

BHP Billiton carried out severe restructuring of its senior management team earlier this month, stripping out a layer of management as part of its bid to improve operational efficiency and slash outgoings. The steps included the appointment of nonferrous-metals head Andrew Mackenzie as chief executive -- he replaces former head Marius Kloppers, who oversaw heavy cost increases in recent years as expenditure and costs spiraled.

The mining giant saw underlying earnings before interest, depreciation, taxes, and amortization drop a hefty 29.3% in 2012 to $13.2 billion, with total revenue slumping 14.1% during the period to $32.2 billion. The company has since announced severe capex scale-backs and divestments in an effort to improve the balance sheet and provide a stable platform for future growth.

How do BHP Billiton's dividend prospects rate against the competition?

 

Prospective Dividend Yield

Prospective P/E Ratio

Mining

256.1%

15.9

FTSE 100

3.1%

15.9

Source: Digital Look.

BHP Billiton currently trades on a P/E readout of 12.7 for 2013, trading at a discount to both the FTSE 100 and its mining counterparts. It also beats the U.K.'s main share index in terms of forward dividend yield, although a handful of companies distort the projected figure for BHP Billiton's fellow dirt-diggers.

Instead, it is worth comparing the firm's metrics with other diversified miners. Glencore Xstrata carries a prospective yield of 3% and trades on a P/E rating of 11.8. And Rio Tinto deals on a forward earnings multiple of 7.9 and boasts a potential yield of 4%.

Although BHP Billiton's ongoing restructuring plan is making huge strides in the right direction, I believe the firm still represents a risky pick for investors. Much work still has to be accomplished to improve the shape of the company and cut costs to respectable levels, in my opinion, while still-volatile commodity prices continue to cloud the miner's earnings outlook. I believe BHP's projected dividend yields can be achieved elsewhere and with less risk attached.

The expert's guide for intelligent investors
Although BHP Billiton currently presents too much risk in my opinion, this newly updated special report highlights a host of other FTSE winners identified by ace fund-manager Neil Woodford. Woodford, head of U.K. Equities at Invesco Perpetual, has more than 30 years' experience in the industry and boasts an exceptional track record when it comes to selecting stock market stars. The report, compiled by The Motley Fool's crack team of analysts, is totally free and comes with no further obligation. Click here now to download your copy.

The article A Closer Look at BHP Billiton's Dividend Potential originally appeared on Fool.com.

Fool contributor Royston Wild has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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