During 2013, I’ve looked at most shares in the FTSE 100 and graded them against these five quality and value indicators:
- Dividend cover
- Borrowings
- Growth
- Price to earnings
- Outlook
Some companies scored highly against the “business quality” indicators of level of borrowings, earnings growth record, and outlook. Other shares scored highly against the “value” indicators of dividend cover and price-to-earnings ratio (P/E).
Quality and value in harmony
However, the most promising investment opportunities scored well on both business quality and value indicators.
In this mini-series, I’m revisiting some of the highest-scoring shares to look at events since the original article and to assess the quality of the investment opportunity now. Some of these high-scoring firms could be investment winners for 2014 and beyond so, today, I’m revisiting diversified resources company BHP Billiton (LSE: BLT) (NYSE: BBL.US), which scored 17 out of 25 in March.
A tough year
In May, long-serving CEO Marius Kloppers stepped down to make way for internally promoted Andrew Mackenzie. The firm has done well under Mr Kloppers, but, thanks to falling commodity prices, 2013 was financially grim despite sound operational progress.
The firm’s trading year, which ended in June, saw revenue down 9% compared to the same time last year, cash flow down 25% and earning per share down 31%. In March, I scored Billiton three out of five for historic growth, but score it only two now.
Weaker earnings have knocked the dividend-cover score too. Based on historic information, earnings covered the dividend almost three times in March; now the cover from earnings is down to around 1.9 times, prompting me to reduce my score from four to three out of five.
Continuing growth in production
Despite a weak year’s trading, recent financial performance is encouraging. The firm increased production by 11% during its first quarter to September, which looks set to help Billiton achieve the 15% growth in earnings that city forecasters are expecting for year ending June 2014.
Net debt is around 1.5 times operating profit, so I’m keeping my score at four out of five for that. A forward P/E of around 12 sits well against earnings growth and yield expectations, leaving my four out of five score unchanged. However, good recent trading and an optimistic outlook inclines me to raise the outlook-score from two to four out of five so, overall, I score Billiton 17 out of 25 now, the same as in March, although the composition of that score is different.
What now?
The share-price performance of commodity companies like BHP Billiton is hard to predict. Volatile commodity prices and P/E compression can offset good performance in production as we move through general economic cycles. Since March, Billiton’s share-price has advanced about 3% and the forward dividend yield is running at around 3.9%.