The end for BHP Billiton Limited’s progressive dividend policy

Credit: Lucas Walters

BHP Billiton Limited (ASX: BHP) is expected to follow the lead set by Rio Tinto Limited (ASX: RIO) in ditching its progressive dividend policy when it reports its earnings results on 23 February.

Rio Tinto announced its 2015 full-year earnings results to the market yesterday afternoon, reporting a huge decrease in revenues and overall earnings. Consolidated revenues were down almost 27% from the prior year, reflecting a decline in revenue of more than $1 billion per month, while it reported a statutory net loss of US$866 million, down from a US$6.5 billion profit in 2014. Underlying earnings were also 51% lower for the year.

Indeed, iron ore prices were crushed during 2015 which had a huge impact on the group’s margins and cash flows, while US$1.8 billion in impairment charges and US$3.3 billion in exchange losses also took their toll.

You can read more about Rio Tinto’s results here.

While a poor result was to be expected, investors were eager to learn what Rio Tinto’s stance was regarding its dividend.

Both Rio Tinto and BHP Billiton have adopted progressive dividend policies, in which they promise to not decrease their payments to shareholders at any six-month interval, regardless of their earnings results. However, as noted by Rio Tinto’s chairman, Jan du Plessis, the company believes that it is no longer in the best interests of the group or its shareholders:

Over the past five years we have returned more than $25 billion to our shareholders, underlining our commitment to shareholder returns. However, with the continuing uncertain market outlook, the board believes that maintaining the current progressive dividend policy would constrain the business and act against shareholders’ long-term interests.”

He added, “We are therefore replacing the progressive dividend policy with a more flexible approach that will allow the distribution of returns to reflect better the company’s position and outlook. For 2016, we intend that the full year dividend will not be less than 110 US cents per share.”

Assuming it pays shareholders just that, the 110 US cents per share would represent a 49% decrease on 2015’s total 215 US cents dividend to shareholders.

BHP Billiton to follow

BHP Billiton has long reiterated its commitment to its progressive dividend policy, but its stance changed at the group’s latest annual general meeting when its chairman Jac Nasser said BHP’s top priority was the strength of its balance sheet, as well as its credit rating.

Like Rio Tinto, BHP Billiton has been crushed by falling commodity prices. Beyond iron ore, it has also been hurt by the oil rout as well as coal and copper which are both suffering too. This has had a dramatic impact on the group’s earnings (partly due to billions of dollars in impairments) and its ability to continue increasing dividends.

Indeed, Standard & Poor’s took its knife to BHP’s credit rating earlier this month, downgrading it from an A+ to an A. That’s not so bad, but it also cautioned further cuts depending on BHP’s earnings results and commentary on 23 February.

As quoted by The Sydney Morning Herald at the time, S&P said: “we could lower the rating by another notch if the company remains committed to its progressive dividend policy while its cash flows are pressured by lower commodity prices.”

BHP Billiton certainly doesn’t want to see its credit rating drop below its current level. Although it will look to cut capital expenditures and continue to improve operating efficiencies, it’s unlikely to be enough for S&P which wants the company to slash billions from its shareholder distributions.

The miner paid out nearly US$6.5 billion in dividends in financial year 2015, representing a 1.7% increase on the prior year. However, some analysts think the dividend could be cut in half, officially putting the miner’s progressive dividend policy to bed.

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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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