Global mining giant BHP Billion (LSE: BLT) has quickly established itself as one of the FTSE 100’s top income plays over the past few years.
After reporting a near-90% fall in net profit for 2015, and then a loss in 2016, BHP reported net income of $5.9bn in 2017. To celebrate, management hiked the group’s dividend payout by 200% in 2017 to $0.85 (64p).
While City analysts are expecting the company’s earnings growth to continue this year, what really grabs my attention is BHP’s free cash flow.
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Plenty of cash
For the six months to December last year, BHP delivered free cash flow of $4.9bn. Underlying attributable profit climbed 25% to just over $4bn. The miner’s robust cash generation allowed management to declare a half-year dividend of $0.55 per share (41p), up 38% year-on-year. City analysts are currently expecting a dividend of $1.20 for the full year. It looks like the firm is on track to hit this target, giving the shares a forward dividend yield of 5.6%.
BHP’s excess cash generation is also allowing the company to pay down debt. Net debt fell 23% to $15.4bn at the end of last year, down nearly 80% from the level reported in 2013. This proves BHP’s dividend is funded with surplus free cash and the firm is not borrowing additional funds to pay the dividend or fund its operations.
Meanwhile, BHP’s cash generation is expected to continue for at least the next two years. It should also receive a boost from its up-for-sale portfolio of onshore US shale assets.
Analysts believe the price tag is $7bn-$9bn. Exiting at $9bn would give the company plenty of funding to reduce net debt below its $10bn-$15bn target range. So, the City is expecting BHP to return several billion of excess funds, after reducing debt.
With this being the case, I believe BHP’s 5.6% dividend yield is an excellent buying opportunity to build a retirement income.
Rebuilding expectations
As well as BHP, utility SSE (LSE: SSE) has a reputation for rewarding investors with market-beating dividends.
Shares in the company have come under pressure this year following management comments that 2018 presented “a number of complex challenges for the group to manage.” These include the merger with supplier Npower and the government’s looming price cap.
Unfortunately, these challenges and rising capital spending requirements, mean SSE is planning to reduce its dividend to 80p per share following the spinoff of its household energy supply business.
Even at the reduced level, I calculate the shares will yield 6%. Management is planning to increase the payout at a rate of at least RPI inflation for the three following years.
It looks as if SSE’s managers have carefully worked out how the company can afford its future dividends. As well as the above dividend promise, the enterprise is also planning to spend £6bn on investing in its operations over the next few years. It appears management has a plan in place to balance the books and grow while returning cash.
It is this forward-thinking attitude that leads me to conclude SSE is a great long-term income buy.
