BHP's Dividend Pledge Undermined by Latest Moody's Rating Review

  • Moody's says commodities rout to reduce earnings and cash flow
  • Market is indicating BHP's dividend will be cut: Liberum

BHP Billiton Ltd.’s decade-old pledge to continually raise its dividend is looking increasingly unsustainable after Moody’s Investors Service put its credit rating on review for possible downgrade, citing the probability of weak commodity prices persisting for years.

This will significantly reduce the world’s biggest mining company’s “earnings and cash flow generation,” Moody’s said in the statement Friday. In the “unlikely” event that BHP takes no countermeasures, the A1 rating the company has held since 2004 is likely to be cut, Moody’s said. A spokesman for Melbourne-based BHP declined to comment.

“There’s certainly scope for them to cut capex and there’s certainly scope to cut the dividend,” Richard Knights of Liberum Capital Ltd. in London, the top ranked analyst covering BHP according to Bloomberg data, said by phone. “Progressive dividends are absolutely gone in the sector. The market is already telling you that the dividend is going to be cut.”

The worst rout in commodities since the global financial crisis has forced most major companies other than BHP and rival Rio Tinto Group to scrap or pare back payouts to investors. Anglo American Plc, a London-based miner of copper, iron ore and diamonds, last week scrapped all payouts through to 2017 to help shield its balance sheet from a downturn that’s forcing mine closures and pushing smaller producers into bankruptcy.

BHP shares rose 1.3 percent by 10:57 a.m. in London, after earlier this week touching the lowest since 2005. The company’s dividend yield is about 13 percent, after paying out $6.6 billion to investors for the year ended June 30.

Moody’s cited BHP’s progressive dividend policy, in place since 2003, and its forecast spending levels as the two key reasons why the company’s critical debt-to-earnings ratio “will not return to a more appropriate level for the rating over the next several years.”

Moody’s said its review will focus on “the potentially very significant countermeasures the company is able to employ -- and the willingness to employ such measures -- to protect its credit metrics in the lower price environment,” Matthew Moore, a Moody’s vice president and senior credit officer, said in the statement. “Specifically Moody’s will be reviewing the company’s ability to further reduce operating costs and capital expenditures, as well as its ability and willingness to reduce its ongoing dividends.”

Commodity prices have fallen to the lowest in 16 years as China’s economic slowdown curbed demand after years of heavy investment in new production.

S&P affirmed its A+ rating on BHP in November with a negative outlook. That reflected the continued weakness and volatility in commodities affecting its earnings and key credit metrics, it said.

BHP Chairman Jac Nasser told investors at the company’s annual general meeting in Perth in November that a decision on the dividend will be made in February, prior to its first-half results announcement. He said the strength of the company’s balance sheet must be the main priority.

“Management have made it clear that the solid A credit rating is a priority, not the dividend,” Liberum’s Knights said. “There’s a lot of self-help that they can deliver. They have previously been of the view that they were going to invest through the cycle. Given where their share price has got to, they have to be thinking about changing that stance.”

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