Here's why BHP Billiton Limited shares are on the nose

It's been a tough week for shareholders of BHP Billiton Limited (ASX:BHP), which has dropped nearly 5% since Tuesday.

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Today marks the third consecutive day in the red for mining heavyweight BHP Billiton Limited (ASX: BHP). Its shares have declined by a total of 4.7% since Tuesday. Since peaking at $39.74 just 5 cents shy of its 52-week high the shares have retreated to just $37.89, and could be headed even lower.

In comparison, Rio Tinto Limited (ASX: RIO) is down just 1.8% and the S&P/ASX 200 Index (INDEXASX: XJO) is up 0.5% in the same time.

Here are the three primary reasons why BHP Billiton's shares are out of the market's favour this week.

  1. Earnings miss. Who would have thought that an underlying earnings figure of US$13.4 billion wouldn't be enough to please investors? As it turns out, the market had been hoping for a little more – according to Bloomberg, consensus estimates were at US$13.58 billion.
  2. Demerger. It's important to note that the majority of the market had been hoping for a demerger, having pushed the shares up around 3% in anticipation leading up to the announcement. The trouble is, while BHP Billiton's Australian and British shareholders will receive shares in the new company ('NewCo'), the company will only be listed on the Australian and South African exchanges. This means that many UK shareholders unable to hold international equities will be forced to sell their shares in NewCo.
  3. Share buyback. This, in my opinion, is the main reason behind the stock sell-off. It was widely expected BHP would return additional capital to shareholders in the form of a share buyback – possibly to the sum of $3 billion. Unfortunately, such a program was not announced while its final dividend was only increased by 5% to US62 cents per share.

A better bet than BHP Billiton

Following years of underperformance, it would have been nice to have seen shareholders rewarded for their patience. Perhaps that's something that can be revisited when the company's net debt falls below the targeted US$25 billion mark, which could be early next year.

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

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