Is BHP Billiton Limited's 10.6% dividend yield worth your attention?

BHP Billiton Limited (ASX:BHP) is said to be offering "the dividend yield of a lifetime".

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Mining behemoth BHP Billiton Limited (ASX: BHP) reported its full-year earnings results after the market's closing bell yesterday, revealing its worst profit in more than a decade.

Like Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), BHP Billiton has fallen victim to crumbling commodity prices. A slowdown in China's economy has been the major culprit impacting demand for resources such as iron ore and oil, while the world's largest commodity producers are also responsible for flooding the market with supplies it simply does not need.

BHP reported a 22.2% decline in total revenue to $52.3 billion, while its net profit after tax (NPAT) fell a whopping 86.2% to just $1.9 billion. The group's underlying net profit, which strips out one-time items, was $6.4 billion – well below the $7.5 billion profit that analysts were expecting, and 51.6% below the $13.3 billion underlying profit posted in the prior year.

The group's underlying earnings were mostly impacted by the fall in iron ore and oil prices. Earnings before interest and tax (EBIT) from BHP's petroleum and potash division fell 67% to $1.9 billion, while EBIT fell 42.7% in its iron ore division to $6.9 billion. The group's total underlying EBIT was $11.9 billion, down from $22.1 billion in 2014.

Here are some of the other important figures you need to be aware of:

  • Net operating cash flow down 25% to $17.8 billion
  • Free cash flow down 26% to $6.3 billion
  • A further $839 million non-cash impairment against its Copper business
  • Over $10 billion of annualised productivity-led gains achieved so far
  • Net debt down by $1.4 billion to $24.4 billion

(Note that all figures mentioned above and below are measured in US dollars, unless otherwise specified).

What happens now?

BHP Billiton reduced capital and exploration expenditure by 24% during the period to $11 billion, while it is expected to fall to $8.5 billion in FY16 and $7 billion in FY17. Given the headwinds facing the industry, this will certainly please investors.

Despite the slowdown in China, management still expects "moderate but sustainable growth" in Chinese steel production over the next decade, although it now believes that crude steel production will peak between 935 million tonnes (Mt) and 985 Mt by 2025. That compares to the miner's previous forecast of 1 billion tonnes between 2025 and 2030.

How will the market respond?

Despite the deplorable result, the company's London-listed shares soared more than 5% which implies the locally-listed stock could also be set for a good day. This can most likely be attributed to the group restating its commitment to its progressive dividend policy – a feature that many analysts and investors had begun to doubt.

Under the policy, BHP pledged to grow or at least maintain its dividend in US dollar terms every six-month period. Yesterday, it announced a US 62 cent (87 cents) per share dividend, which is the equivalent to the final dividend from the 2014 financial year (FY14). It increased its dividend by 2.5% over the full-year to US 124 cents per share.

According to The Sydney Morning Herald, analysts are saying BHP is offering "the dividend yield of a lifetime". Indeed, its fully franked yield now sits at 7.4% for a grossed up yield of 10.6% (based on Tuesday's closing price of $23.34 per share).

Although that might seem irresistible – particularly in this low interest rate environment – investors need to take into consideration the strong headwinds that are facing the sector. Indeed, any further falls in the miner's share price could more than offset the income from dividends received meaning that your hard-earned money could be better invested elsewhere.

Still, BHP could certainly be deserving of a position on your long-term watchlist.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. You can follow Ryan on Twitter @ASXvalueinvest. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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