BHP Billiton Limited (ASX: BHP) shareholders didn't seem too fazed by the miner's massive US$7.2 billion ($10.3 billion) impairment charge on Friday. In fact, the miner's share price jumped as much as 5.8% at one point, adding billions of dollars back onto its market value at that time.
It's clear that investors had expected some sort of major write-down. The shares hit a fresh decade-low price of $14.45 during the week and were trading at roughly 0.9x their book value, according to figures provided by Capital IQ. Given the level of media attention it receives, a company like BHP can't possibly trade 'under the radar' so it is clear that investors were attributing a lower value to its assets than what had previously been reported in its balance sheet figures.
Throw in the fact that oil prices have been smashed since the beginning of the year – falling from around US$37 a barrel on 4 January to less than US$30 during the week – and BHP was clearly going to have trouble defending those previously reported values.
But while asset write-downs were expected, investors will also wonder what impact the announcement could have on BHP's fully franked dividend.
What it means for the dividend
"Progressive dividends are absolutely gone in the sector. The market is already telling you that the dividend is going to be cut."
Richard Knights of Liberum Capital in London, as quoted by The Sydney Morning Herald in December 2015.
It should be noted that the write-downs will not impact the miner's cash flows. That is, the miner doesn't have to fork out US$7.2 billion (or US$4.9 billion after tax) in cash as a result – it will simply decrease the value of its assets on its balance sheet to reflect the adjustment.
It will however impact the miner's profit, even though BHP will recognise it as an "exceptional item" in its financial report for the half-year ended 31 December 2015.
However, given that BHP Billiton's dividend policy is to increase or at least maintain its US-denominated dividends to shareholders every six months, regardless of profit, yesterday's announcement shouldn't have a direct impact on the miner's dividend payments.
In a different sense however, it is my opinion that BHP's dividend isn't safe at all.
Even in the face of plummeting commodity prices, BHP Billiton's management team has defended the sustainability of its so-called "progressive dividend" policy.
However, at its recent annual meeting, it also noted that the strength of its balance sheet was its top priority, along with maintaining its Moody's A1 credit rating that it has held for more than a decade. Its rating was put under review in December based on the likelihood of further falls in commodity prices impacting BHP's earnings potential.
In light of yesterday's write-down, it's possible that Moody's will now reassess BHP's A1 rating. In order to prevent that, BHP will likely need to cut capital expenditures (which it is already doing) and reduce its cash outlays to shareholders in the form of dividends. That will help it maintain more cash on its balance sheet and could allow it to keep that prized credit rating.
What it means for investors
While other resources companies, including Fortescue Metals Group Limited (ASX: FMG), Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO), have all cut their dividends in response to crashing earnings, BHP Billiton has thus far managed to increase, or at least maintain, its dividend payments every six months.
As it stands, the miner's shares are trading on an 11.1% fully franked dividend yield (based on a share price of $15.20).
That is outstanding, but also very unrealistic for a company of BHP's calibre – especially in this low interest rate environment. The high yield reflects the market's expectations that BHP will be forced to forget its promise and scrap its progressive dividend policy.
Although yesterday's announcement won't have a direct impact on cash flows, it could be the nail in the coffin for those massive dividend payments with some analysts suggesting they could actually be cut in half. It'd still be a decent yield, but may not make up for the risks facing the underlying business as conditions in the resources sector continue to deteriorate.
