BHP Billiton Limited's (ASX: BHP) credit rating has been put under review and that probably means that its 'progressive dividend' policy has been too.
As highlighted by The Sydney Morning Herald, ratings agency Moody's said on Friday that it was reviewing BHP Billiton's credit rating, citing the probability of weak commodity prices which are expected to persist for years.
Iron ore and oil, which are BHP's two most important commodities, have crashed and are both hovering near multi-year lows, as are copper and coal, which are BHP's other two core resources. Unfortunately for BHP and other miners in the sector, conditions are widely expected to worsen before they get better.
What this means is that revenues and cash flows into the business are likely to weaken and mightn't be offset by any efficiency improvements being undertaken by the miner. That will continue to impact earnings and overall shareholder returns.
BHP Billiton's management has already made it perfectly clear that the strength of its balance sheet remains its top priority. It said just that at its most recent annual general meeting in what was one of the first clear indications from the company that its progressive dividend policy could be headed for the scrap-heap.
Moody's acknowledged that by cutting its dividend payouts to shareholders (it distributed US$6.5 billion in the 2015 financial year), and by cutting back on its capital expenditures, it could potentially maintain its A1 credit rating, which it has held for more than a decade.
Dividend trouble
Investors have long been conflicted regarding BHP Billiton's stance on dividends.
On the one hand, the dividend represents such a key aspect to overall shareholder returns and the reliability of knowing the miner would increase, or at very least maintain its dividend at every six-month interval was reassuring.
As it stands however, the miner's shares are currently trading on a 10% fully franked dividend yield, or 14.3% when grossed up for franking credits. Given how widely-held BHP's shares are, it is clear that investors lack the belief that those payments can actually be sustained.
While many would no doubt be disappointed to see BHP scrap its progressive dividend policy, others would likely be relieved. For the long-term sustainability of the company itself, such an action may be necessary – especially if commodity prices do remain depressed for an extended period of time.
