BHP Billiton: Profits down 5.5%, dividend up 20%, but commodity prices fall and demand weakens

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BHP Billiton Limited (ASX: BHP), the world's largest mining company by market value, announced a 5.5% fall in net profit, down to US$9,941m, although revenues increased by 9.7% to US$37,480m.

The company said that prices for many of its products declined amid concerns surrounding European liquidity which culminated in a general deterioration in commodities demand. It  expects volatility to persist due to the European debt crisis and general weakness in manufacturing and construction sectors in its key markets are both going to weigh on customer behaviour and sentiment.

BHP also expects steelmaking raw materials demand to slow, especially in China, however it expects this to be partially offset by robust growth in machinery and transportation sectors, which should support iron ore and coal prices.

Net debt has risen to US$21.5bn, an increase of US$15.6bn since 30 June 2011, mainly due to the acquisition of Petrohawk Energy for US$12.1bn.

BHP also announced an increased dividend payment of US 55 cents per share, up 20% over previous corresponding period.

Double Whammy
BHP is feeling the double whammy effects of a slowdown in demand from China & India, and falls in commodity prices. Despite that, BHP has US$27bn in growth projects in execution around the world, and is expanding more and more into energy products.

The majority of BHP's EBIT (Earnings Before Interest and Tax) comes from Iron Ore (49%), while petroleum, base metals (copper, nickel, zinc and lead) and coal are significant contributors to its earnings, as you can see from the chart below. Any major fall in the price of iron ore will have a significant impact on BHP's earnings.

In the short term, BHP expects continued weakness and volatility, so any thoughts of topping 2011's US$23.6bn in 2012 have been dashed. I expect 2ndhalf 2012 net profits to be lower than the 1sthalf due to lower commodity prices and decelerating demand for its products.

In the long term, BHP expects demand for its products to grow as urbanisation and industrialisation in China, India and other emerging economies drives demand for its products.

The Foolish bottom line
At the current price of A$37.57, and trading on an historical PE ratio of 9.55, you certainly can't go past BHP as a long term investment if you want exposure to resources and energy.

BHP also offers more diversification than either Rio Tinto Limited (ASX: RIO) or Fortescue Metals Group Limited (ASX: FMG). Both Rio and Fortescue are predominantly iron ore miners.

Are you looking for quality stock ideas? Motley Fool readers can click here to request a new free report titled The Motley Fool's Top Stock For 2012.

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 Motley Fool contributor Mike King doesn't own shares in BHP. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

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