3 solid reasons BHP Billiton Limited should be on your watchlist

Given its below-par returns in recent years and its strong long-term prospects, analysts and investors entered into 2014 viewing BHP Billiton Limited (ASX: BHP) with a rather bullish investment case. In fact, some even predicted that its returns could help drive the broader S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) towards that lucrative 6,000 point mark.

However, conditions have yet again proven difficult for the mining sector with most of the miners having fallen in value since the beginning of the year. Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO), for instance, have fallen 14.4% and 10% while BHP has dropped 6.4%. These results have largely been influenced by volatile commodity prices, whereby iron ore and copper have fallen in value substantially since the beginning of the year.

However, there are still a number of reasons to like BHP as an investment. Here are three such reasons:

1. Diversified

The miners have absolutely no control over the price of commodities. If a commodity falls in value, so will the company’s margins and therefore its profits. While there is no way of knowing which direction the price of each commodity will go, diversification is necessary to spread the level of risk being assumed.

BHP is the world’s most diversified miner. While iron ore remains the key focus for Fortescue and Rio Tinto, BHP also focuses on coal, copper and petroleum as part of its “four pillar” strategy. It is likely that potash, a key fertiliser ingredient, will soon become its fifth.

2.  Cost Cutting

While the miner is ramping up its production levels and improving productivity, it is also heavily focused on reducing costs which will boost margins and profitability. In its half-year results, BHP’s CEO Andrew Mackenzie said: “Annualised productivity led volume and cost efficiencies totalling US$4.9 billion are now embedded and this is expected to increase to US$5.5 billion by the end of the 2014 financial year.”

Given these cost cutting initiatives, internal competition for project funding has heavily increased. The miner believes an average rate of return of greater than 20% (after-tax) is achievable for their portfolio of major development options.

3.  Shareholder returns

After years of underachievement, shareholders have demanded greater distributions and BHP looks set to deliver. The miner has indicated that once its net debt falls to US$25 billion, it will explore options such as a special dividend or a share buyback program, although it would more likely be the latter as it is seen to be the more rewarding option for long-term investors.

The company reduced its debt from $29 billion to $27.1 billion in its first-half operations. Further cost cutting and the possible sale of a number of its underperforming assets (particularly in its nickel division) could see it hit its target by as early as August.

Foolish takeaway

Given the high level of volatility currently blanketing the mining sector, it would be wise to remain on the sidelines for now. However, there is a lot to like about the behemoth that is BHP and it would certainly have my attention if its shares fell much further.

Get it now: "2 Hot Stocks for the Next Australian Tech Boom"!

The smart money is already on the move... and savvy investors will want to add these two ASX tech stocks to their portfolios sooner, not later! You can get all the details - including names and codes - in The Motley Fool's brand-new FREE report,
"2 Hot Stocks for the Next Australian Tech Boom." Simply click this link now to claim your FREE copy.

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.