Shares in BHP Billiton Limited (ASX: BHP) dropped to a low of just $37 today, down 6.9% since the miner released its full-year earnings report just over one week ago. The stock has traded between a low of $34.35 and a $39.79 high over the last 12 months, putting its current price at around the mid-way point.
There are a number of factors that are likely acting as a weight on the stock. Aside from narrowly missing consensus earnings and failing to announce a much anticipated share buyback program (which really disappointed the market), the tumbling iron ore price is likely also impacting investor confidence.
Overnight, the commodity dropped a further 0.8% to just US$88.20 a tonne, its lowest level in more than two years, based on fears surrounding the housing outlook in China. Its price has dropped nearly 35% since the beginning of the calendar year and some economists suggest it could fall to as low as US$80 in the coming months.
Should you buy BHP Billiton?
Tumbling iron ore prices could certainly impact BHP Billiton's margins, so in a way it is understandable that the market would react so harshly to the news. However, BHP is also heavily increasing its volumes of the product which will not only help offset the falling price, but will also help reduce overall operating costs.
One of the things that I like most about BHP – and what makes it standout compared to rivals Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) – is its high level of diversification. BHP is not only focused on iron ore, but also on coal, copper and petroleum, as well as potash. As such, I believe the market may be reacting a little strongly to the iron ore price drop.
At today's price, BHP is trading on a P/E ratio of just 13.8 and offers a fully franked 3.5% dividend yield. While I don't expect the capital gains to be explosive (given the miner's sheer size), I do believe BHP Billiton could be a great stock to buy now and hold for the foreseeable future.