BHP Billiton is in Serious Trouble

It was back to the doghouse for BHP Billiton Limited (ASX: BHP) and the ASX on Wednesday.

After Tuesday’s glorious climb, spurred by the Reserve Bank of Australia’s surprise interest rate cut, the S&P/ASX 200 (ASX: XJO) was back on the rocks.

The main index shed 1.5%, falling below 5,300 points once again.

For us long-term investors, that’s not such a bad thing…

After all, lower share prices make buying quality businesses all the more appealing.

Why pay more when you can pay less!?

Still, there is an element of disappointment for investors who have longed for a return to the 6,000-point mark.

Credit Suisse still thinks we’ll get there by the end of the year…

It’s certainly possible, especially if interest rates do fall further, but at the end of the day it’s the long-term that counts.

A $58 billion clean-up bill

In saying that, perhaps we should be paying more attention to the collapse in BHP Billiton’s shares on Wednesday…

The shares crashed 9.4%

It was the miner’s worst day in seven-and-a-half years, according to The Sydney Morning Herald…

Prior to that, BHP Billiton had enjoyed a remarkable few months.

After they plunged as low as $14.06 in January, the miner’s shares rallied on the back of soaring iron ore and oil prices.

The shares even peaked above $21 a fortnight ago, tempting many investors to buy.

But then came the news nobody wanted to read…

BHP Billiton and Vale, together with their subsidiary Samarco, are being chased for roughly $58 billion.

The civil suit is in relation to the tragedy that occurred in Brazil late last year.

19 people were killed and an almost unprecedented amount of environmental damage was caused when one of the tailings dams at the Samarco iron ore operations collapsed.

The Brazilian government and the two states that were impacted are also being targeted as part of the suit, likely due to any allegations of negligence on their behalf…

So, where did the $58.2 billion figure come from?

According to The Wall Street Journal, the damages being sought were at least partially based upon the cost of the Deepwater Horizon oil spill in the United States.

For BP, The Economist says that amounted to a whopping pre-tax charge of US$53.8 billion ($71.9 billion).

The WSJ quoted the report (my emphasis)…

Based on preliminary studies, the human, economic and socio-environmental impacts caused by the break of the Fundão dam (in Brazil) are at least equivalent to those verified in the Gulf of Mexico.”

It continued…

It doesn’t seem technically or morally credible that…the human, cultural or environmental value of Brazil should be inferior to that of other countries.”

A claim of that magnitude couldn’t have come at a worse time for BHP…

Although iron ore and oil prices have rebounded, the sustainability of those rebounds is certainly questionable.

If, or when, they fall, that will once again put unwanted pressure on BHP’s earnings and cash flows.

It’s also likely to push the miner’s shares back down…

All things considered, it’s hardly surprising the market reacted so severely to yesterday’s news…

Especially when the iron ore price had also slipped. The resource fell another 5.2% overnight, according to The Metal Bulletin, and is down 9.3% since Tuesday.

So don’t be surprised if BHP’s shares get hit again today…

Speaking of severe reactions, Woolworths Limited (ASX: WOW) was back in the news yesterday, and for all the wrong reasons.

The retail giant posted its third-quarter earnings results on Tuesday.

Comparable sales were down 0.9% as it was beaten convincingly by its arch-rival Coles once again.

By comparison, Coles, owned by Wesfarmers Ltd (ASX: WES), grew its same-store-sales by 4.4%.

Both companies adjusted their numbers for Easter.

The fact is, it’s going to take time to turn Woolworths around…

By focusing too heavily on margins, Woolworths lost sight of its competition and is now paying a hefty price.

While the results themselves were disappointing, however, the market’s response was compounded by yet another update on Wednesday (my emphasis):

(Woolworths) notes today’s announcement by Standard & Poor’s that its issuer rating and senior unsecured notes have been downgraded by one notch from BBB+ (Outlook Negative) to BBB (Outlook Stable).

As it stands, the group is still rated Baa2 (Outlook Negative) by Moody’s, but there is no guarantee that won’t change.

As a lower credit rating usually reflects higher risk, this could push Woolworths’ cost of borrowing up, which is the last thing the group needs at a time like this.

Woolworths’ shares have now fallen 15.2% since the beginning of the year.

They dropped 7% yesterday alone and are sitting at their lowest price in a decade

Are these blue chip stocks really as safe as you think?

Over the weekend, an article from The Australian Financial Review presented the views of Nathan Parkin, the deputy head of equities at Perpetual.

The article noted (my emphasis):

The message is simple, investors might think they’re in the safe or defensive part of the market but they’re not. One day it will all turn.”

For the sake of context, he wasn’t talking specifically about the miners, or Woolworths, or even the major banks for that matter.

But I believe the same can also be said for shares of those businesses.

For a long time, investors have relied heavily on a select pool of shares, most of which can be found at the very top end of the market.

And for some, it has been a very rewarding strategy.

But if there is one thing that we’ve witnessed over the last 12 months, it is that these companies are not immune to heavy falls or declining fundamentals.

It is clear that has happened for both Woolworths and BHP, but the same also rings true for the banks!

Earlier in the week, Australia and New Zealand Banking Group (ASX: ANZ) saw its earnings hammered while it also cut its dividend for the first time since the Global Financial Crisis.

Westpac Banking Corp’s (ASX: WBC) results weren’t crash hot, either…

It didn’t cut its dividend, but it is becoming crystal clear that the days of huge profit growth for the banks are likely behind them.

What this highlights is the need to consider the size and weightings of each of these companies in your own portfolios…

Regardless of whether they generated strong gains for you in the past, that doesn’t mean they are guaranteed to continue doing so in the future.

Diversification is a must.

It could also be a great idea to consider some of the companies outside of the traditional blue chip shares – many of which have plenty of growth in front of them.

BRAND NEW! Our Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.