With shares of BHP Billiton Limited (ASX: BHP) once again hovering around the $30 mark – down from more than $34 just over a month ago – some investors will be pondering an investment in the Big Australian.
Although BHP Billiton is looking more appealing now than it was in early March, there are still a number of compelling reasons why investors should continue to avoid the stock. Here are three of those reasons…
- Iron ore, which is BHP Billiton's most important commodity, has fallen to a decade low at around US$47 a tonne, according to the Metal Bulletin. Unfortunately, as the world's biggest miners continue ramping up their production rates, prices look set to fall even further before bottoming out which will put pressure on the miner's profits.
- Oil prices are another big worry for BHP. Petroleum is BHP Billiton's second most important commodity and, like iron ore, the resource's price is being forced lower by excess supply. While some analysts are suggesting that oil prices could hit rock bottom this quarter, it is clear that there could be plenty more pain in store before conditions begin to improve.
- BHP Billiton's progressive dividend policy is one of the key factors supporting the share price. While the miner has set a target to increase each of its semi-annual dividends (in US currency terms), some analysts have stated that it's only a matter of time before this initiative becomes unsustainable as BHP's cash flows continue to be squeezed. If shareholder returns take another hit, you can expect investors to flock for the exits en masse.
Although BHP Billiton is tipped to yield 5.2% this financial year (fully franked), it may not be the most appropriate stock for the average income investor. Given the miner's cash flow pressure as a result of the commodities crisis, investors may be better off targeting companies with more predictable and sustainable yields, such as the company our top investment advisor just named his #1 dividend stock for 2015 and beyond.
