If you look through the ASX, most companies maintain dividend policies whereby they commit to distribute a certain percentage of earnings to shareholders.
For instance, a company with a dividend payout ratio of 75% would distribute 7.5 cents for every 10 cents in earnings per share.
But not BHP Billiton Limited (ASX: BHP)…
BHP Billiton has what it refers to as a 'progressive' dividend policy, in which it is committed to increase, or at very least maintain, its US-denominated dividend to shareholders every six-months.
It's a policy that shareholders grew to love during the boom years with BHP not cutting its dividend since the late 1980s. But now, even its biggest shareholders think it's an 'aspiration' which cannot be maintained in the long run.
According to The Australian Financial Review, that's the view of Ross Barker, managing director for top 10 shareholder, the Australian Foundation Investment Company.
He reportedly said: "We accept that it is the company's aspiration but it has to be subservient to the need to make sure debt is kept sensible… In our view, as a long-term investor, the balance sheet is more important."
BHP's monstrous fully franked dividend yield is likely one of the factors stopping its shares from falling even further right now as it battles against falling commodity prices.
It hit another speed-hump just over a week ago when one of its tailings dams in Brazil collapsed. The catastrophe will likely cost the miner north of US$500 million, while the mine itself may never reopen for business.
Scrapping the progressive dividend policy would no doubt disappoint investors and could even see shares plunge in the short-term, but it seems as though it would be the best course of action in the long run.
BHP Billiton itself has discussed the possibility of taking out more short-term debt to fund the policy which would place its balance sheet under even more pressure. The alternative would be to sell some assets to raise cash, but that too would weaken its balance sheet position.
The coming years will be truly testing for BHP Billiton, as well as for rivals such as Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).
Key commodity prices are expected to continue falling, adding pressure to margins and overall cash flows. If earnings continue to drop, it'll be very difficult for BHP Billiton to justify increasing its dividend payments just for the sake of saving face with investors.
Although the shares are trading around their lowest price since 2008, I'm not a buyer of BHP Billiton today and believe investors should focus their attention elsewhere.
