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Dividend report card: BHP Billiton Limited

Credit: Lucas Walters

BHP Billiton Limited (ASX: BHP) has been a major faller in 2015, with its shares slumping by 31% since the turn of the year. While disappointing, the decline in the outlook and performance of the wider mining sector is a key reason for this, with most of BHP’s competitors also posting major valuation falls in recent months.

At least partly due to its share price fall, BHP now yields 8.7% based on its current year payout. That’s 400 basis points higher than the ASX’s yield of 4.7% and, looking ahead to next year, BHP is due to cut dividends only slightly.

This means that in the next two financial years BHP could deliver a total income return of around 17.4%, which is clearly enticing for yield-hungry investors.

Of course, BHP has historically been an excellent dividend payer, with shareholder payouts increasing at an annualised rate of 15.6% during the last decade. Furthermore, many investors have been attracted to BHP’s relative diversity, with it mining a wide range of metals and also being heavily involved in oil production, too.

And, with the company having a strong balance sheet as evidenced by a gearing ratio of just 25.7% and a reduction in net debt of US$1.4bn to US$24.4bn in the last financial year, it appears to be more financially sound than a number of its resources sector peers.

In addition, BHP continues to make sensible decisions regarding its long term strategy. For example, it has spun-off a number of non-core assets via South32. This should allow BHP to focus on the assets which it believes will offer the most favourable risk/reward opportunities in the long term, thereby providing scope for increased efficiencies and productivity gains. On this topic, BHP last year recorded US$4.1bn in productivity gains, which is two years ahead of its target for this level of savings.

Furthermore, BHP is adopting a prudent approach regarding its cash management. For example, it reduced capital and exploration expenditure to US$11bn in financial year 2015 and expects to cut this further to US$8.5bn in financial year 2016. And, with production increasing year-on-year BHP is able to offset a portion of the savage commodity price falls which have been a feature of the industry in recent years.

Despite this, BHP is still forecast to post a fall in net profit of 68% in the current year. Alongside an increase in dividends per share of 8.7%, this means that BHP’s dividends are uncovered by profit, with the company’s dividend coverage ratio standing at just 0.33.

Looking ahead to next year, BHP is forecast to increase earnings by 18%, but dividends are still due to be uncovered by profit. This means that a dividend cut is very much on the cards, with the current yield of 8.7% indicating that the market is already beginning to price in a fall in BHP’s shareholder payouts.

So, while BHP does appear to be an appealing, albeit risky, investment for the long run, its appeal as a dividend stock is somewhat questionable. Certainly, the resources sector has never been a particularly stable space for income-seeking investors but, with profit coming under pressure and dividends not yet being cut, BHP appears to be a relatively risky income stock compared to a number of its ASX index peers.

As such, income-seekers may be better off investing elsewhere, although BHP remains an enticing long term buy for value investors in my opinion.

Of course, there is another ASX stock which I believe could outperform BHP Billiton.

In fact, it's recently been named as The Motley Fool's Top Stock For 2015 and could make a real impact on your bottom line as we move through the year. As a result, it's well worth finding out more about it.

Click here to do so - it's completely free and comes without any obligation.

Motley Fool contributor Peter Stephens owns shares in BHP Billiton and South32. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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