Investors looking to buy into a top blue-chip miner generally find themselves asking the question: should I go for BHP Billiton (LSE: BLT) or Rio Tinto (LSE: RIO)?
Unfortunately, when it comes to valuation there are two factors that can lead investors astray. I’ll tell you about them and then look at the valuation of the two companies today.
Two factors often overlooked
The first thing we need to understand is that BHP and Rio are both dual-listed companies (DLCs). A DLC is two corporations, with separate stock exchange listings and registers of shareholders, but which functions and reports its accounts as a single operating business. In the case of BHP and Rio, this means we need to add together the market capitalisations of their London-listed and Australian-listed entities for any ‘price-to’ valuation measure we calculate, such as price-to-book (P/B).
The second issue investors often overlook is that the two companies have different financial year-ends. BHP’s is 30 June and Rio’s is 31 December. In volatile times for commodities, profits can change dramatically over six months. In order to value the companies on a like-for-like basis we need to compare not their latest annual numbers or forecast annual numbers, but trailing 12-month (ttm) or forward 12-month (ftm) numbers.
Price-to-book
| Recent share price (p) | Market cap (£bn) | Net assets at 31/12/16 (£bn) | P/B | |
| BHP | 1,346 | 71.6 (UK 28.4+ Aus. 43.2) | 50.75 | 1.4 |
| RIO | 3,355 | 60.6 (UK 46.4 + Aus. 14.2) | 37.18 | 1.6 |
You’ll find at least one popular financial website currently showing BHP with a P/B of 0.6 and Rio with a P/B of 1.2. This is an error, which comes from not including the Australian part of the market cap. So don’t make the mistake of thinking that BHP is trading at a bargain discount to net assets.
Price-to-sales
For P/S we need to remember not only to use the combined UK/Australian market cap, but also ttm and ftm numbers
| Sales ttm (£bn) | P/S ttm | Sales ftm (£bn) | P/S ftm | |
| BHP | 27.64 | 2.6 | 31.9 | 2.2 |
| RIO | 27.46 | 2.2 | 31.1 | 1.9 |
Again you may find some financial websites giving lower P/S ratios, particularly for BHP. Indeed, BHP actually comes out cheaper than Rio, if you make the mistake of forgetting the Australian part of the market cap.
Price-to-earnings and dividend yield
The same considerations need to be applied for P/E and dividend yield, although here we’re helped by the companies’ accounts giving earnings per share and dividend per share (correctly calculated using the total of UK and Australian shares).
| P/E ttm | P/E ftm | Yield ttm | Yield ftm | |
| BHP | 21.7 | 13.7 | 3.2% | 4.4% |
| RIO | 14.5 | 10.0 | 4.0% | 5.6% |
Bottom line
BHP is currently a bit cheaper on P/B but Rio comes out as better value on P/S, P/E and yield. If I had to pick one stock, I’d go for Rio but with both looking reasonably cheap against the market as a whole, I might be inclined to spilt a holding between the two.