Will BHP Billiton plc Really Yield 12.2% This Year?

Is BHP Billiton plc’s (LON: BLT) dividend unsustainable?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

At a time when interest rates are low and many investors are seeking out high yields, BHP Billiton’s (LSE: BLT) yield of 12.2% holds huge appeal.

To put it in perspective, it’s three times the yield of the FTSE 100 and 24.4 times the current Bank of England base rate. Furthermore, it’s over six times the best savings account rate on offer (including short-term fixed rates) and if it’s paid every year over the next decade would equate to a total return (without taking into account capital gains) of 216%.

Too good to be true?

The problem though, is that BHP Billiton’s yield may be too good to be true. While it’s a highly diversified business with a very strong balance sheet and excellent cash flow, its earnings have plummeted to such an extent that the dividend due to be paid in the current financial year seems to be unaffordable.

Should you invest £1,000 in Prudential right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Prudential made the list?

See the 6 stocks

For example, BHP Billiton is expected to pay out dividends of 77p in the 2016 financial year, but its earnings are due to come in at less than half that, with a forecast of 33.8p per share. This means that BHP Billiton will have to dig into its cash reserves or else borrow to pay out such a high dividend. In the long run, that situation is clearly unsustainable.

Moreover, paying such a high dividend could be bad for the company’s long-term profit outlook. That’s because just as it can pay to be a value investor who purchases shares in high quality companies when they’re trading on low valuations, companies such as BHP Billiton can do just the same.

For example, BHP Billiton could increase the size and quality of its asset base instead of paying out such high dividends to its investors. Doing so could lead to considerable synergies as well as an improved long-term growth outlook, thereby causing improved prospects for sustained dividend growth in the long run.

Of course, BHP Billiton’s dividend could be affordable at its current level if it increased profit at a rapid rate in a short period of time. While the company’s strategy to cut costs and rationalise is very sound, it’s unlikely to make a big enough difference to make the current level of shareholder payouts affordable. And while there’s always the prospect of an increase in commodity prices, the chances of this seem slim in the short run with supply and demand being so grossly out of equilibrium.

So, while BHP Billiton’s long-term future remains sound and it’s likely to come through the current commodity crisis in a stronger position relative to its peers, its 12.2% dividend yield appears to be highly unsustainable. As such, it appears to be worth buying, but only for investors who aren’t banking on a double-digit payout over the medium-to-long term.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Down 65% from its highs, this FTSE 250 stock is one to consider buying low

Shares in a strong FTSE 250 company going through a cyclical downturn have caught Stephen Wright’s attention as a potential…

Read more »

Investing Articles

£20,000 invested in a Stocks and Shares ISA 5 years ago is now worth…

Stocks and Shares ISA investors have reaped enormous returns since the pandemic, but how much money have they actually made?…

Read more »