Here’s why BHP Billiton Limited shares could fall even further

My boss might not like me saying this too much, but BHP Billiton Limited (ASX: BHP) is still not a great buy at today’s price.

Just yesterday, Bruce Jackson, General Manager of The Motley Fool Australia, highlighted BHP’s compelling fully franked dividend yield. At $28.40 – which is its lowest price in more than five years – the stock is trading on a forecast yield of 5.1%, fully franked. That’s a whopping 7.3% yield when grossed up for franking credits.

As a long-term shareholder of BHP Billiton, Bruce has been waiting anxiously for an opportunity to buy even more of the stock below $30, and may have taken advantage of the opportunity at some point in the last few days.

I’ll admit, I’ve certainly been tempted by the Big Australian myself. BHP Billiton remains my miner of choice, given its high level of diversification, its low cost operations and its growing dividend.

While the stock is sitting firmly on my watchlist, I haven’t yet pulled the trigger on actually buying the stock. Although BHP’s shares might look cheap by historical standards (even compared to four months ago, the stock is trading at a 28% discount), there is still a risk the stock will fall even further in the coming weeks or months.

The stock has taken a pummelling since August as a result of the tumbling iron ore and oil prices. While iron ore has lost nearly half of its value since 2013 (where it traded at US$135 a tonne), oil has also lost more than 40% since June with global supply continuing to heavily outweigh demand. Given that iron ore and petroleum products account for more than 50% of BHP’s revenues, this scenario could have a huge impact on the miner’s margins and overall profits.

While this is already partially built into the stock’s flailing price, any further falls in the commodities’ prices will continue to drag the shares even lower. Some estimates suggest oil could fall as low as US$40 a barrel, from today’s price of roughly US$60 a barrel, while iron ore could tumble below US$60 a tonne, down from US$69.14 a tonne currently.

With that in mind, BHP’s shares could be in for more pain in the near future, and investors who hold off for a little while longer could be rewarded with an even lower price and even more appealing dividend yield.

While you wait for BHP Billiton, there’s an even more promising dividend stock to buy right now.

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

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