I'm always surprised by the fact that so many Australians are invested in mining simply because companies like BHP Billiton Limited (ASX: BHP) are so dominant. Now before you object – and claim you don't own BHP shares – have a moment to think about it.
BHP is the second biggest company in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) after the Commonwealth Bank of Australia (ASX: CBA). If you own an index fund, you definitely own some BHP shares. In fact, if your superannuation is a big managed (retail or industry) super fund, then you almost certainly have an indirect interest in BHP shares.
However, investors in fossil fuel free funds such as those managed by Australian Ethical Investments Limited (ASX: AEF) don't own shares in BHP. Instead, they own blue-chips like blood plasma and vaccine distributor CSL Limited (ASX: CSL). I think, over the long term, those investors will do a lot better. Personally, I'd definitely choose CSL over BHP – here's why:
1. CSL Limited has performed extremely well over the long term. As the 10-year chart below shows, the CSL share price has increased at about four times the rate BHP's has.
2. CSL has an improving return on investment (ROI). That means that as the company grows, it is able to deploy (limited amounts of) capital ever-more effectively. In this context, it makes a lot of sense for the company to be buying back shares.
3. BHP's return on investment depends largely on factors outside its control, particularly, commodity prices. It's therefore no surprise that BHP Billiton's ROI is quite unpredictable.
4. CSL's business will increasingly benefit from an increasing healthcare spend in developing countries and the ageing population in developed countries. In comparison, BHP will be exposed to commodity cycles, and the ongoing shift towards sustainable use of resources.
5. CSL has an extremely deep moat. Like BHP it benefits from scale, but its advantage goes deeper. It is able to make and market multiple products from the blood it collects, and setting up the systems to do that is more difficult, even, than setting up a mine. It understands all the regulatory requirements in all the markets it exports to. It has the plasma products and vaccines that are so important to countries in crisis. Politically, CSL doesn't need to fund advertising campaigns or make big donations – politicians are taking big risks if they damage the company.
Although I think CSL is the better long-term bet, I also think BHP has its strengths. It has a trailing yield of almost 3.5% and its own competitive advantage in diversification. Having said that, because mining is cyclical, I'd only consider buying shares if the company was witnessing its weaker competitors go out of business (or at least being severely crippled).
