BHP Billiton Limited (ASX: BHP) is doing all it can to maintain its so-called 'progressive dividend' policy, but it still seems destined to fail — possibly in the near future.
At its recent annual general meeting in Perth, the miner reiterated its intention to continue maintaining or increasing its US-denominated dividend at each six-month period, but also made it clear that the strength of its balance sheet took priority. That includes protecting its credit rating.
As highlighted by the Fairfax press, UBS analyst Glyn Lawcock now believes that BHP will be forced to cut its dividend for the first time since its merger with Billiton in 2001 if commodity prices continue to decline, thereby compromising the strength of the underlying business.
Indeed, the prices of commodities like iron ore and oil have fallen sharply in recent years, acting as a heavy drag on earnings across the sector. While BHP Billiton and rival Rio Tinto Limited (ASX: RIO) remain somewhat protected due to their low cost operations, lower commodity prices are still constricting margins with BHP's profit declining 86.2% during the 2015 financial year.
Further weakness in commodity prices and the recent disaster at Samarco, Brazil, threaten to see further contraction in earnings this year.
As it stands, BHP Billiton's shares are trading for just $20, having fallen 35% over the last 12 months from roughly $30.80 per share. At their current price, they're trading on a trailing 8.4% fully franked dividend yield, or 12% when grossed up.
While that is almost unheard of for a blue-chip company like BHP Billiton, it also highlights the market's lack of confidence that the miner will actually be able to sustain those payments. Otherwise, in a low interest rate environment such as this, investors would snap the shares up in a heartbeat.
Although investors would no doubt be disappointed if (or when) BHP's board does eventually scrap the progressive dividend policy, it could also ease concerns and uncertainty regarding the company's future. While many investors argue that CEO Andrew Mackenzie missed his chance to scrap the policy when BHP demerged South32 Ltd (ASX: S32), it seems inevitable that it will happen at some point in the near future anyway.
BHP Billiton itself expects iron ore prices to continue dropping, and the market isn't too confident on the future of coal or oil either. All in all, the immediate future isn't looking too bright for BHP Billiton and is reason enough for investors to stay away, for now at least.
