Putting $10,000 into BHP Billiton Limited shares might not be a smart idea

BHP Billiton Limited (ASX: BHP) has long been a favourite of Australian investors for its wide range of assets, considerable size, and US-dollar reporting.

However, with the value of many commodities like oil, iron ore, and coal plunging like a stone, many are learning the hard way that commodity demand isn’t a one way street.

Yet surely a company with BHP’s experienced management, global footprint and extensive financial and mineral resources can weather the slumps. Perhaps today’s prices represent outstanding value for BHP, and it is set to deliver significant capital gains to shareholders over the next few years?

Or perhaps not. But if you’d invested $10,000 in BHP 10 years ago, before the mining boom really kicked off, would that have proved a sound investment?

source: Google Finance

source: Google Finance

A$10,028 invested on December 9, 2005, would have bought you 460 shares at a price of $21.80 each. BHP shares now trade for $17.16 apiece, a 21.3% loss. Your 460 shares are now worth A$7,893.60.

During those 10 years, BHP paid a total of US$9.37 dividends per share, for a total of US$4,310.60 in dividends. Check the chart from Yahoo Finance (below) showing the value of the Australian Dollar against the US Dollar during that period of time.

Ballpark figure, we might say that the AUD was worth an average of US$0.85 during that time, i.e., each USD buys A$1.17. This works out to roughly A$5,043.

source: Yahoo Finance

source: Yahoo Finance

Including dividends, your initial $10,028 investment (now worth $7,893.60) is worth $12,936.60, or a gain of 29.3% in the past ten years. I wasn’t able to source information on the franking status of old dividends, but the shareholder may have experienced another $1,000 or more extra benefits in the form of tax credits.

BHP also demerged from South32 Ltd (ASX: S32) and shareholders received 1 South32 share for each BHP share they held. In this scenario you would also have 460 S32 shares, worth an additional A$920 when you received them, or A$478 currently.

For an income investor, it could have been a shrewd move; BHP successfully grew its dividend by nearly 300% during those 10 years and now yields over 8%, although the company remains a slave to commodity prices.

Other major producers Rio Tinto Limited (ASX: RIO), and Woodside Petroleum Limited (ASX: WPL) have also been able to convert their growth into significant increases in dividends and earnings per share over the past decade.

Unfortunately, weak commodity prices mean that shareholders in all three companies are unable to get their full initial investment back, and indeed it may be several years before share prices recover. Furthermore, dividends at all three businesses are likely to slim down this year, meaning investors may not even have the solace of an 8% dividend yield.

Regardless of how big a company is, its share price and earnings cannot move for long against the gravity of commodity prices. BHP Billiton has not been an outstanding investment over the past 10 years.

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Motley Fool contributor Sean O'Neill 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. 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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