The global financial crisis made ‘too big to fail’ a catchphrase that was applied to many of the world’s biggest banks, which governments belatedly discovered would cause catastrophic damage to the global economy, if they were allowed to fail.
However, I think there is a second type of business that’s too big to fail. One example is global commodities giant BHP Billiton (LSE: BLT) (NYSE: BBL.US), which has a market capitalisation of £100bn and is the fifth largest company in the FTSE 100, ahead of big names such as BP (£84bn), Rio Tinto (£54bn) and commodities and mining giant Glencore Xstrata (£41bn).
BHP’s scale, profitability and diversity give its business a substantial economic moat, in my view, and I think it is unlikely to fail in my lifetime.
Three key strengths
The scale of BHP’s operations is hard to grasp; last year, it produced 187m tonnes of iron ore, 236m barrels of oil equivalent (nearly 30% of BP’s current production) and 1.2m tonnes of copper, along with 111m tonnes of coal.
BHP is also extremely profitable. In the 2012/13 financial year, BHP’s sold $20bn worth of iron ore at a gross profit margin of 55%. Gross profits from petroleum were a healthy 42%, while copper’s gross margin was 30%. Although the cost of developing new assets is high, this is clearly a business that can withstand lower commodity prices when necessary.
BHP’s final strength is its geographic diversity. Its operations are scattered all over the world, but most of its key businesses are in stable, developed countries such as Australia, reducing political and operational risks.
Compelling valuation
In other sectors, a company with such lucrative, large-scale assets would be highly valued, but the commodities sector is still winding down from the boom of the last decade and adjusting to a slower pace of growth.
As a result, big miners are only just beginning to come back into favour with the markets. BHP currently trades on a forecast P/E of 10 and a prospective yield of 4.2%, compared to 14 and 3.3% for the FTSE 100 as a whole.
BHP’s income credentials are excellent — its dividend has risen every year since at least 1998 — and I think it could be an excellent long-term ‘buy and forget’ share, which will provide income investors with a commodity-backed income, to complement dividends from other sectors.
An inflation-beating income?
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> Roland owns shares in BP and Rio Tinto but does not own shares in any of the other companies mentioned in this article.