Is BHP Billiton Limited's gigantic dividend in danger?

BHP Billiton Limited's (ASX:BHP) progressive dividend policy has come under the microscope recently with the miner's "four pillar" commodities all scraping the bottom of the barrel.

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BHP Billiton Limited's (ASX: BHP) progressive dividend policy has come under the microscope recently with the miner's "four pillar" commodities all scraping the bottom of the barrel.

While the collapse of oil and iron ore (BHP Billiton's two biggest earners) has been well documented, the miner's other two primary commodities, copper and coal, are also sitting at multi-year lows. Indeed, the commodity crisis has taken its toll on BHP's shares which have today dropped to a near-six year low at $26.50 – a loss of one third of their value in the last five months.

Now, the miner's progressive dividend policy is also being questioned. Under the policy, BHP Billiton aims to steadily increase, or at very least maintain, its dividend in US dollar terms each half-year. While it has managed to uphold this policy for more than a decade, it is debatable whether the miner can (or should) stick to its promise with the crisis putting enormous pressure on its cash flow.

As highlighted by Fairfax media, some investors are of the view that BHP Billiton has the responsibility to stick to the policy. After all, the miner has declined to return cash to investors in any other form, even through 'super profit' years, despite numerous calls to do so. Then again, it's possible that BHP would need to take out billions of dollars in debt to help fund the policy which would weaken its balance sheet position and increase costs moving forward. While it has the capacity to do so, it may not be in the best interests for the miner in the long term.

The Verdict

Despite the cash flow pressure, it's unlikely that CEO Andrew Mackenzie will want to breach the dividend policy so early in his tenure. Right now, there are two scenarios which seem most likely to play out:

  1. The miner is still adamant on going ahead with its 'South32' demerger. While BHP Billiton's dividend might remain unchanged, South32 could also pay a dividend, therefore increasing total returns to shareholders who hold onto both stocks.
  2. BHP has guided for US$14.2 billion in capex, but has room to move on that target. As highlighted by the Australian Financial Review, BHP Billiton would generate US$20.3 billion of operating cash flow in the current year at current spot oil prices, which should be able to cover its US$6.5 billion dividend commitment.

Right now, Morningstar estimates BHP Billiton could pay a dividend worth $1.519 Australian dollars in the 2015 financial year. At the stock's current price, that would suggest a fully franked yield of 5.7%, making it one of the most appealing dividend yields on the market.

However, the stock itself remains a risky prospect. With commodity prices tipped to fall even further over the coming 12 months, BHP's shares could continue their retreat, wiping out any benefits recognised from the solid dividend. It seems the best thing investors could do right now is to add the stock to their watchlist, but wait for commodity prices to stabilise (or the stock to fall even further) before making a purchase. Until then, there are plenty of other great dividend stocks worth buying today.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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