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IS BHP Billiton Limited about to slash its dividend?

Global mining-giant BHP Billiton Limited (ASX: BHP) held its much anticipated annual general meeting (AGM) in Perth on Thursday.

As expected, the session was dominated by talk surrounding the recent Brazilian mine disaster and the miner’s dividend policy, which many analysts and investors have come to believe is unsustainable in the long-run.

“The balance sheet must always come first”

BHP has what it calls a ‘progressive dividend’ policy, in which it promises to at very least maintain its US-denominated dividend during every half-year period. While it has so far managed to maintain or increase its payouts every year since its 2001 merger with Billiton, commodity prices have since crashed and are expected to fall even further, putting the policy under strain.

Of course, there are ways to keep paying the dividends to shareholders, including taking out more debt, reducing growth capital expenditures and even through asset sales. The problem is, each of these methods has the potential to weaken the group’s balance sheet, putting it in a more vulnerable position for the future.

In today’s AGM, the miner’s chairman, Jac Nasser, reiterated that “we will never put (the balance sheet) at risk” and that “the balance sheet must always come first”. While the miner didn’t scrap its dividend policy, the comments from Nasser certainly suggest that it is a possibility moving forward to not compromise the health of the underlying business.

The tragedy at Samarco

Of course, the Brazilian mine disaster a fortnight ago was always going to be a key topic, and one where investors would demand answers.

Based on the latest figures available to it, BHP Billiton believes that 11 people died in the disaster while another eight are still missing. While tragic from a human-loss perspective, it was also extremely damaging to the environment and could end up costing more than US$1 billion in clean-up costs and potential fines (the Samarco business is 50% owned by BHP Billiton and 50% by Vale).

Indeed, Samarco has already guaranteed the allocation of funds totalling US$260 million to an emergency fund for community support and rebuilding. The Australian Financial Review also reported that a Brazilian lawyer representing a community association is demanding the business pay $3.7 billion in compensation for environmental damage, so there truly is no telling just yet just how much it will cost in total.

Mr. Nasser said: “I commit to you that we will find out what went wrong” and will release the findings publicly, while CEO Andrew Mackenzie said he was “deeply sorry” for the tragedy and everyone impacted by it.

He said: “We are in this for the long term and will continue to work with Vale and the people of Samarco to make sure there is a strong future for the region.”

Global Economy

While BHP’s dividend policy and Samarco were the key topics during the AGM, Mr Nasser also provided some insight into where he thinks the global economy is heading in 2016. Encouragingly, he said that global growth would return to “healthier levels”, although most analysts still believe commodity prices will come under further pressure in the coming years which doesn’t bode well for the miner.

Foolish takeaway

Earlier in the week, veteran mining reporter Trevor Sykes called BHP Billiton a “red hot buy“, citing its ability to cut capital expenditures, its huge selloff recently and its unbelievable dividend yield. He had some very interesting points, and ones that could prove to be true.

The problem is, there is so much uncertainty surrounding the company right now, which is likely one of the reasons the shares have fallen so hard. No one knows how much BHP Billiton will have to pay for the Samarco incident, nor do they know how low commodity prices will fall or if it can keep paying its dividend.

Buying BHP Billiton today could yet prove to be a great decision in the long-run. At the same time however, it carries huge risks which could still result in further falls in the share price in the coming weeks and months. At this point, I’m not a buyer of BHP Billiton’s shares.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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