When BHP Billiton Limited (ASX: BHP) reported its full-year earnings last week, investors were relieved to learn that management was still committed to its progressive dividend policy.
The miner increased its fully franked dividend to 124 US cents per share (cps), up from 121 US cps in the 2014 financial year. At today's exchange rate, that equates to $1.74 per share in Australian currency, or a fully franked yield of 6.9% (grossed up to 9.9%) as at yesterday's closing price.
In today's low interest rate environment, such a high yield can prove irresistible to some income-hungry investors. Indeed, by comparison, you'd be lucky to get 3% per annum by investing your money in a long-term term deposit.
A Value Trap
Although the yield itself might seem tempting; investors ought to approach the mining giant with extreme caution.
As highlighted above, BHP Billiton is committed to its dividend policy by which it has promised to increase, or at least maintain its US-denominated dividend payments every half-year period. Whether this commitment is sustainable or not though is another matter.
As my colleague Mike King highlighted last week, BHP Billiton is now paying out more in dividends than it is generating in earnings per share for the first time since 2006 (as seen in the chart below). That's danger territory for investors, particularly with commodity prices tipped to continue falling and putting even more pressure on the miner's net profit.
Source: CapitalIQ and Motley Fool Australia
The miner could certainly look to borrow more to fund the shareholder payments, while it could also look to sell some of its assets to free up some more cash. Either way, the underlying business would likely weaken under either scenario which could see the share price fall even further.
Speaking of which, BHP's shares are down another 2.1% today despite an 8% increase in oil prices overnight. Unfortunately, I believe BHP's shares will come under even more pressure over the coming weeks and months – the impact of which would likely offset any potential gains to be made from the dividend income.
While I believe BHP Billiton deserves a position on your long-term watchlist in case the shares fall considerably below today's level, I do not believe it presents as a standout buy today. Thankfully, there are plenty of great alternatives if it's solid dividends that you seek.
