Another day, another set of results from the resources sector. Today Ill be taking you on a tour of BHP Billitons (LSE: BLT) (NYSE: BBY.US) interim results and setting out my rationale for steering clear despite the company being one of the most diversified in the sector, making the moves that it needs to in a difficult environment, the potential for hidden value and sticking to its progressive dividend policy.
Reducing Costs And Capital Expenditure
In light of the collapse of commodity prices over recent months, unit cash costs have been cut by 29% and capital expenditure has been reduced by 23% to US$6.4 billion in the half year to December. The total for the year to June is expected to be US$12.6 billion. It is expected that this will reduce further to US$10.8 billion in the year to June 2016. In addition to these savings, productivity gains of US$2.4 billion were realised in the period, with that figure expected to increase to US$4 billion in the year to June 2017. Despite all these initiatives, profits slipped by 31% however, this was better than the market was expecting.
Not All Bad
Despite the 31% dip in profits, the shares have risen by over 4% today as I type. Whilst there are a lot of moving parts, I think that there could be hidden value here. The company is a global player and owns world-class assets should we see commodity prices start to rise, I think we will see a sharp revision of the share price. The interesting thing for me here is the proposed demerger, resulting in the creation of a company named South32, named after the 32nd parallel south line of latitude that links its two regional offices, being Australia and South Africa. As the name may suggest, the new company will be responsible for the current assets in the southern hemisphere and will be headquartered in Perth, Australia. Whilst further details will be released in March, the company has promised not to rebase its dividend policy downwards, implying a higher underlying payout ratio, andSouth32will adopt its own dividend policy going forward.
Why Steer Clear?
I have to say that there is a lot to like about this company. It seems to be making all of the right moves in terms of keeping costs under control and prudently reducing its capital expenditure, together with a progressive dividend policy and the possibility of hidden value within, should the demerger go ahead.
But for me, there is one overriding basic concern: commodities. This company is heavily reliant on the prevailing market prices all of which have crashed. Whilst they could rise from here, there is nothing to say that they might go lower, dragging the share price with it. I like to sleep soundly at night, not worrying about the price of things that I cannot control. For that reason alone, Ill sit and watch on the sidelines.
So, if you are a Fool like me who likes their sleep, then I can highly recommend this free reportshowing you how you can follow a simple strategy, which shows you how to create dividends for life. There is no need to chase the latest ‘story stock’ or the ‘next big thing’ — just sit back, relax and take a minute to read it by clicking here – it’s free, without obligation and will show you how dividends can provide the foundations for a more dependable portfolio.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.
Dave Sullivan has no position in any shares mentioned. 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.