When I think of resources giant BHP Billiton (LSE: BLT) (NYSE: BBL.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Focused operations
Investors often cite diversification as a major attraction of big resources companies such as BHP Billiton. The theory goes that pricing and other risks can be mitigated by running a wide spread of operations across several commodities and in many different regions. That’s a fine theory, but in practice, companies often excel by concentrating and focusing operations across a smaller product range and in targeted markets.
So, there’s a balance to be struck and BHP Billiton reckons it has been simplifying its portfolio for several years. Since the end of 2011 alone, the firm has committed to or completed divestments in Australia, the United States, Canada, South Africa and the United Kingdom. Those sales mean it’s out with assets involved in petroleum, copper, coal, mineral sands, uranium and diamonds.
The directors’ rationale for such pruning is that a focus on what they call the four pillars of iron ore, copper, coal and petroleum assets will retain the benefits of diversification whilst also generating strong free cash flow. Digging out costs and ratcheting up efficiencies by chopping peripheral activities should deliver a shot at achieving superior returns on the firm’s capital investment. The company is keeping its options open with regard to adopting potash as a fifth pillar.
I think today’s competitive world demands lean, mean, focused operating businesses and that large unwieldy enterprises will find their economics increasingly challenged. BHP Billiton’s commitment to change and improvement is encouraging.
2) Rising productivity
The firm’s strategy seems to be delivering. Recent half-year results reported a 31% rise in underlying profit thanks to a focus on costs and what the directors describe as a substantial increase in productivity.
Productivity gains seem set to continue. Billiton reckons global economic conditions improved during its December 2013 half year. Looking forward, the directors reckon the balance of risk to global growth is skewed to the upside as indicated by a broad-based alignment of macroeconomic indicators in the major developed economies. That sounds about as positive as it gets. It’s always worth listening to the big mining companies’ forecasts; after all, they are working at both the literal and metaphorical coalfaces and feel the macro-economic pulse most keenly.
What now?
The directors recently hiked the dividend by 3.5% and new investors will enjoy a forward yield predicted to be around 4.1% at current share-price levels.