Photographer: Carla Gottgens/Bloomberg

Biggest Australian Stock Dividend Besieged as BHP's Woes Deepen

  • Brazil tragedy adds to payout concern after commodity slump
  • Shaw and Partners buying BHP, says dividend worries overdone

BHP Billiton Ltd. has already lost its title as Australia’s most valuable stock, and now its status as the biggest dividend-payer may be under threat.

The mining company’s market value is down A$161 billion ($115 billion) from a 2008 peak, when it had almost three times as much clout in the country’s equity index as its nearest rival. BHP may be forced to cut shareholder payouts as a deadly mining disaster in Brazil adds to the company’s woes amid slumping commodity prices and slowing global growth, according to Craigs Investment Partners Ltd. BHP gave $6.5 billion to shareholders in the most recent financial year, more than any other Australian listed company, and has committed to steadily increasing its payouts.

“There’s a view in the market that they should be open to cutting the dividend, that they shouldn’t be desperate to hold it up at all costs,” Mark Lister, head of private wealth research at Craigs Investment Partners in Wellington, which manages about $7.2 billion, said by phone. “There isn’t unanimous support for the dividend being held at existing levels. Whether they have to listen to some of those corners of the market and take some action, it’s looking increasingly likely,” he said.

BHP’s payout policy is in focus after its Brazilian iron-ore joint venture with Vale SA was devastated by mudslides caused by the rupture of dams last week. The site is now indefinitely closed and Deutsche Bank AG said cleanup costs may exceed $1 billion.

Credit Rating

Even before the disaster, Standard & Poor’s and Fitch Ratings Ltd. put BHP’s credit rating on negative outlook, citing headwinds from declining commodity prices amid an economic slowdown in China, the biggest consumer of raw materials. Both companies currently rank BHP at A+, the fifth-highest level.

“There is little doubt that pressure is growing on either BHP’s credit rating, or on its progressive dividend policy,” National Australia Bank Ltd. credit strategist Michael Bush wrote in a note on Friday, pointing to tumbling commodity prices and the Brazil disaster.

Chairman Jac Nasser last month pointed to the company’s balance sheet strength as providing BHP with the confidence to pursue its policy of raising returns to shareholders, the producer said Friday in an e-mailed response to questions.

Share Slump

BHP’s Australian shares are down 13 percent since the Brazil dam collapse, and are trading at the cheapest valuation since 1998. That’s been a shock to pension savers who favor the stock, says Karl Goody, who helps oversee about A$10 billion as a private wealth manager at Shaw and Partners Ltd. in Sydney. The shares fell 11 percent this week in Sydney, the most since 2008.

“It’s been difficult fielding the calls because when retail clients are seeing a staple of their superannuation funds and self managed funds, it does get a little bit worrying seeing the stock fall so much,” Goody said in a phone interview. “It’s not what they expect out of the stock. Confidence is a massive thing and when you see a rolling snowball effect from such a company, people are often just wanting to get out rather than look at the underlying value of the company.”

Goody’s firm is buying the mining company’s shares, he said, betting BHP’s decline has gone too far. A more than $5 billion capital raising last month gives BHP financial flexibility to pay its dividends, he said.

Rescue Efforts

BHP and partner Vale are assisting Brazilian authorities with rescue efforts, providing aid to victims and making the area safe again, Chief Executive Officer Andrew Mackenzie told reporters Wednesday. Two dams at Samarco Mineracao SA’s iron-ore operation burst on Nov. 5, unleashing a torrent of muddy water that killed at least nine people in Minas Gerais state. Samarco said 637 people have been placed in hotels and shelters. Authorities are searching for 19 people who remain missing, according to the Mariana city website.

“This accident will add further pressure to BHP’s cash flow, growth and safeguarding of the progressive dividend,” Anna Mulholland, a London-based analyst at Deutsche Bank AG wrote in a report.

After its 26 percent share slump this year, the company offers an 8.7 percent projected payout yield, according to data compiled by Bloomberg. Eleven analysts recommend buying the Australian shares, while another 11 say hold and one says sell. BHP’s policy is to “steadily increase or at least maintain" the payout per share, in U.S. dollar terms, at each financial half year.

Commodity Slump

With commodities trading at the lowest prices in more than a decade, any further declines could force BHP to halt the policy, said Jason Beddow, chief executive officer of Argo Investments Ltd., which manages about A$5 billion in Australia and holds BHP shares. 

“Commodity prices could get so weak that the cash flow won’t be sustainable enough to keep paying a progressive dividend,” he said. “While you can afford to pay it, then you’re fine. If you can’t, then having a locked in dividend policy does restrict you.”

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