Oil and mining companies around the world are being forced to reduce – or else scrap – their dividends to shareholders, and BHP Billiton Limited (ASX: BHP) could be forced to do the same.
According to The Australian Financial Review, a recent report from the Henderson Global Dividend Index for the third quarter shows that BHP Billiton ranked 11th in the world based on the value of its dividend payment. It was the top-ranked Australian company, ahead of Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC), and just behind global tech giant Apple.
However, the sustainability of the miner's so-called "progressive dividend policy" has been called into question. Under the policy, BHP promises to increase, or at least maintain, its US-denominated dividends in every six-month period, a task which was certainly achievable during the mining boom.
However, commodity prices have fallen heavily more recently, putting BHP's cash flows and earnings under strain. Other miners around the world are in a similar position and have been forced to cut their dividends as a result with the AFR reporting a 21.4% year-on-year sector-wide decline during the third quarter.
Basic materials companies were the next worst-performing sector for dividend growth, down 7.4% year-on-year.
While BHP Billiton has so far managed to buck that trend, the clock appears to be ticking on just how long it can sustain its promise to shareholders. As if falling commodity prices weren't enough, the catastrophic failure of ones of its tailings dams in Brazil just over a week ago could lead to the end of the policy with the tragedy tipped to cost the miner more than US$500 million in clean-up fees and fines.
BHP Billiton's shares have fallen another 0.4% today and are hovering near their lowest price since 2008 at $20.17. At that price, they're trading on an 8.3% fully franked dividend yield but the fact that the shares continue to fall reflects the market's lack of confidence that those payments can be sustained.
Despite its low price, I'm not a buyer of BHP Billiton shares and think there are far better alternatives to consider today.
