Is the BHP Billiton Limited dividend set to be axed in half?

Credit: Lucas Walters

The share price of BHP Billiton Limited (ASX: BHP) is coming under further pressure today after the Fairfax press reported that analysts at JP Morgan reckon the miner might have to cut its dividend in half next year.

This is just what I wrote last Monday as the company’s progressive dividend policy looks a near certainty to be dumped as the group’s cash flows prove inadequate on the back of tumbling oil, copper and iron ore prices.

At its recent AGM, BHP’s chairman Jac Nasser dropped a humongous hint to investors that balance sheet health would take priority over borrowing to support its dividend policy.

Moreover, at today’s share price of $18.93 the group offers a trailing yield of 8.8% which means that even if the dividend were cut in half the yield would still be 4.4% – hardly an amount to complain about given crashing commodity prices.

JP Morgan reportedly suggesting that the risk of “fresh falls in copper prices” increased the likelihood that the dividend could collapse in half. Copper prices are often seen as a proxy for global growth and worryingly the copper price recently slumped to its lowest level since 2009 – the year that marked the bottom of the GFC, widely regarded as in March 2009.

Investors then need to consider if the commodity and copper crash of 2015 is a warning sign that global growth and equity markets are not far behind in walking off a cliff, or if the commodity falls are a symptom of oversupply flooding the markets as Chinese demand in particular softens.

My money’s on the latter which suggests major miners like BHP, Rio Tinto Limited (ASX: RIO) and South32 Ltd (ASX: S32) will be trading sideways for a couple of years yet, while supply and demand realign and the best investment opportunities sit outside the resources space.

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Motley Fool contributor Tom Richardson 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 find Tom on Twitter @tommyr345

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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