At present, BHP Billiton (LSE:BLT) (NYSE:BBL) offers a solid dividend yield of 4.1%, while the FTSE 100 as a whole only offers an average yield of 3.5%. What’s more, BHP has raised its annual dividend payout every year since 2002. That’s 11 consecutive years of payout growth — despite commodity prices crashing during 2008.
Actually, BHP’s robust dividend history and larger-than-average yield indicates to me that BHP could now be a dividend play. However, can investors trust the company’s payout?
Will BHP’s dividend record continue?
BHP is easily the biggest mining company in the world by market capitalization, and the company didn’t achieve that way being careless. Unlike many mining companies, which rely on one commodity for the bulk of their income — a strategy that can lead to volatile earnings as commodity prices change rapidly — BHP’s business is well diversified.
For example, BHP uses a ‘four pillars’ business strategy. In other words, the bulk of BHP’s operating income comes from four separate sources — oil & gas, coal, iron ore and copper — with no reliance on a single commodity. All in all, this means that stable cash flows from the company’s oil & gas production can keep profits strong during periods of low coal, iron ore and copper prices, supporting any dividend commitments.
Growth lies ahead
Indeed, BHP is actually, increasing its oil & gas production during the next few years and management expect hydrocarbon production to generate almost one-third of BHP’s production growth to 2015.
Specifically, BHP is focusing on its shale oil assets within the United States and expects these assets alone to generate $3 billion in cash annually for the company by 2020. At present, BHP is spending $4 billion per annum getting these assets into production and management expects to break even by 2016.
Numbers support the payout
Moreover, BHP’s income statement supports the argument that the company’s payout is secure, and it would appear that there is even room for growth. In particular, on average during the past five years the dividend payout has been covered approximately twice by EPS.
Furthermore, by looking at BHP’s cash flow statement we can see that the company’s cumulative dividend payout cost $6.2 billion for 2013, easily covered by $18.3 billion in cash generated from operations. And BHP’s finances should only get better as the company is slashing capital spending, from a total of $22 billion, spent during 2013, to a maximum of $16 billion this year.
Foolish summary
With an above average dividend yield, a payout history stretching back more than a decade, strong cash flows and plenty of room for payout growth, it would appear as if BHP is a great dividend play.