At a time when interest rates are low and many investors are seeking out high yields, BHP Billitons (LSE: BLT) yield of 12.2% holds huge appeal.
To put it in perspective, its three times the yield of the FTSE 100 and 24.4 times the current Bank of England base rate. Furthermore, its over six times the best savings account rate on offer (including short-term fixed rates) and if its 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 Billitons yield may be too good to be true. While its 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.
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 aforecast 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 companys long-term profit outlook. Thats because just as it can pay to be a value investor who purchases shares in high quality companies when theyre 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 Billitons dividend could be affordable at its current level if it increased profit at a rapid rate in a short period of time. While the companys strategy to cut costs and rationalise is very sound, its unlikely to make a big enough difference to make the current level of shareholder payouts affordable. And while theres 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 Billitons long-term future remains sound and its 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 arent banking on a double-digit payout over the medium-to-long term.
Despite this, it may be worth taking a look at A Top Income Share From The Motley Fool.
The company in question could make a real impact on your income prospects in 2016 and beyond. And in time, it could help you retire early, pay off your mortgage, or simply enjoy a more abundant lifestyle.
Click here to find out all about it – doing so is completely free and comes without any obligation.