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BHP flags potential share buyback program

It has been suggested that mining heavyweight BHP Billiton (ASX: BHP) could begin a share buyback program within the next two years, after chief executive Andrew Mackenzie ‘surprised’ analysts by revealing some of the company’s targets regarding capital management.

The company’s full-year results, released last Tuesday, showed a current net debt level of US$29.1 billion. Speaking to analysts, Mackenzie stated that a net debt level of US$25 billion would be needed to allow the company to grow and maintain its current level of spending.

Many analysts have taken this to mean that any level of debt below this target would clear the path for increased shareholder returns in the form of share buybacks. According to UBS analysts Glyn Lawcock, Mackenzie stated that a share buyback was the only form of capital management the company would consider, given that it is a dual-listed entity.

The good news for investors is that this target could be met within the next two years. Based on UBS estimates, BHP could reduce its debt levels by up to US$3 billion this financial year and again in the 2014-15 year. Meanwhile, if the miner continues to sell off underperforming assets and commodity prices remain high, the announcement date of capital returns could be brought forward.

Increasing capital returns, along with significant cost cutting and reduced capital spending, has been one of the miner’s key focuses since the induction of Mackenzie as CEO earlier this year. With the mining boom now considered to be well and truly a thing of the past, many other companies including Rio Tinto (ASX: RIO) also share this goal.

Foolish takeaway

Decreased demand from China and falling commodity prices have taken their toll on the value of BHP’s shares. Together with its progressive dividend policy, investors would welcome news of a share buyback program.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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