BHP Billiton (LSE: BLT) (NYSE: BBL.US) is currently trying to grapple with the perfect storm. You see, the company was designed around a four-pillars strategy as it gave the group diversification away from one commodity. So, in theory if the price of coal — one of the pillars — declined, there would be three more pillars, or commodities being produced, to pick up the slack.
However, right now the markets for coal, oil, copper and iron ore — all of BHP’s four pillars — are oversupplied and prices are collapsing. Specifically, over the past 12 months the price of copper has fallen 17% to a four-year low, the price of oil has fallen to a low not seen since 2009, the price of iron ore has fallen by around 50% and the price of coal is hitting lows not seen for a decade.
Even as the world’s largest diversified miner, BHP is not going to be able to dig itself out of this hole and something will have to give.
Figures suggest a cut
Unfortunately, BHP’s 2014 figures show that the company has very little room for manoeuvre as the prices of key commodities slump. For example, for the year to 30 June 2014, BHP generated just over $25bn in cash from operations, capital spending totalled $16bn and the dividend cost the company $6.4bn. All in all, the company generated approximately $2.6bn from operations after payment of the dividend and capital spending.
But with the price of key commodities such as oil, iron ore and copper slumping over the past 12 months, it’s reasonable to assume that BHP’s operating cash flow for 2015 will be significantly below the figure reported for 2014.
Cutting costs
Still, as income slumps BHP is doing everything it can to reduce costs and increase margins. Indeed, the company plans to trim $600m from its capital spending budget for 2015. This should take total capex down to $14.2bn for the 2015 financial year. A further cut of $1bn to $13bn is planned for the following year. Additionally, management is now targeting at least another $4bn of productivity related gains by the end of the 2017 financial year.
The question is, will this be enough?
Right now, City analysts seem to think so. Analysts currently expect BHP to pay a dividend of 78.4p per share this year, followed by a payout of 81.6p next year, although this depends on the company’s ability to cut costs effectively.
Analysts are only expecting the company’s revenue to increase 5% between 2014 and 2017, that’s a measly compounded annual growth rate of 1.4%. Earnings are expected to grow at a similar rate.
The bottom line
All in all, BHP’s dividend payout is under pressure. Although City analysts currently believe that the payout is safe for the next few years, any further deterioration in commodity prices, or increase in costs will really put BHP under pressure as cash flow shrinks.