It Could Be Time To Dump BHP Billiton plc And Buy AstraZeneca plc

As BHP Billiton’s (LSE: BLT) share price slumps to new lows, one of the only things that’s keeping investors interested in the company is its 11.1% dividend yield. 

However, now that Glencore and Anglo American have suspended their dividend payouts to investors, BHP’s management is under pressure to do the same. 

The perfect storm

BHP is facing the perfect storm of events. The prices of all four of the company’s four ‘key pillar’ commodities are under pressure. Copper hit a new six-year low this week, coal and iron ore are both trading at (or close to) all-time lows and the price of oil continues to plunge. 

With no end to falling prices in sight, the writing is on the wall for BHP. Even if management doesn’t want to cut the company’s payout, its hand may be forced. BHP can only cut capital spending so far before operational efficiency starts to deteriorate and costs begin to rise. Also the company is facing a potential $3.5bn fine for its part in the Brazil dam disaster, which killed at least 13 people and devastated Brazil’s second-largest river system, the Rio Doce basin. 

And the figures show that BHP is already struggling to scrape together the cash needed to fund its dividend payout to shareholders. 

For example, the figures for BHP’s last financial year (ending June 2015) show that the company generated $19.3bn in cash from operations during the year. Capital spending for the year totalled $12.9bn, leaving $6.4bn for the dividend, which cost $6.5bn. Commodity prices have deteriorated since BHP reported these figures. 

A better investment

On the other hand, as BHP tries to navigate its way through all of these issues, AstraZeneca’s (LSE: AZN) outlook is only improving. 

Unlike BHP, Astra has control over the price of its products. BHP is forced to accept market rates for the commodities it mines, which makes it difficult to calculate a long-term valuation for the company and its assets. However, Astra’s management is quite upbeat about the company’s prospects and believes that the group has what it takes to return to growth by 2017. And this forecast has more weight behind it than any predictions about BHP’s future performance. 

Investing for growth

During the past 10 years, Astra has spent around $5bn per annum on R&D, that’s just under a fifth of revenues. The company now has more than 200 new products under development and City analysts believe that AstraZeneca’s treatment pipeline is robust enough to return the group to growth by 2017.

Analysts estimate that Astra’s new product sales could top $21bn – 90% of existing sales – by 2022 in a best-case scenario. Some of these products are already going through the final phases of testing, so to a certain extent Astra’s growth is de-risked and unlike BHP, investors don’t have to cross their fingers and hope iron ore prices recover. 

Then there’s Astra’s dividend yield to consider. The company’s shares currently support a dividend yield of 4.2% and the payout is covered one-and-a-half times by earnings per share, which leaves plenty of headroom if Astra’s growth is slower than expected.