Should you own BHP Billiton Limited shares in 2016?

Credit: Lucas Walters

Shares of BHP Billiton Limited (ASX: BHP) are trading lower again today, which pretty much sums up their year so far in 2015. As it stands, the shares are trading at $17.85 which is 1.3% below yesterday’s closing price and down 35% since the beginning of the year.

Source: Google Finance; one-year BHP share price chart

Source: Google Finance; one-year BHP share price chart

Needless to say, investors will be glad to put the year in their rear-view mirrors with 2015 likely to go down as one of the miner’s worst years in recent memory, plagued by crashing commodity prices, plunging earnings and a disaster at one of its mines in Brazil. The question is, will 2016 be much of the same?

Indeed, commodity prices are the big concern moving forward, as are the declining growth rates in China which has for so long acted as the key driver for the global resources industry. As China transitions from an economy driven by infrastructural investment to one driven mostly by services, demand for resources like iron ore, coal and oil will likely continue to decline.

Of course, much of this has likely already been baked into the prices for those commodities, but many economists fear there is still worse to come. Iron ore, for instance, could fall to around US$35 a tonne (or lower), according to some economists, while some expect oil prices will fall to around US$20 a barrel. Given that those two resources are BHP’s two most important commodities, that would not bode well for the miner’s cash flows or earnings.

Of course, there is also the concern that dwindling cash flows could impact BHP’s ability to maintain its so-called ‘progressive dividend’ policy, especially if it is to maintain its credit rating and the strength of its balance sheet. The monstrous dividend yield at which BHP’s shares are currently trading on suggest that investors lack the confidence it will be maintained going forward, and that could dampen the market’s appetite for the miner’s shares even more.

Although some analysts have suggested BHP Billiton’s shares are a good buy now, given that they’re still hovering near their lowest price in more than a decade, there is a chance that conditions could get even worse in 2016. Whether or not that happens, it certainly appears there are far greater opportunities out there that don’t carry the same kind of risks as BHP which could be worth pursuing first.

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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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