Why BHP Billiton Limited is such a poor investment

Credit: Lucas Walters

BHP Billiton Limited (ASX: BHP) is a staple share in many investors portfolios – and virtually every fund manager that tracks the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has the company in their funds.

But the company has seriously let down its investors over the past 10-20 years, thanks to multiple bad acquisitions, shocking capital allocation decisions and some would even say a merger with Billiton that in hindsight probably shouldn’t have gone ahead.

The latter is particularly evident after BHP demerged its non-core assets into South32 Ltd (ASX: S32). Billiton effectively added thermal coal, aluminium, manganese and nickel to BHP’s existing iron ore, copper and coking coal, as well as steel, diamonds and an oil and gas division.

South32 now holds some of those coal, manganese, aluminium and nickel assets, while BHP’s steel businesses have been spun out into Bluescope Steel Limited (ASX: BSL) and Arrium Ltd (ASX: ARI), while the diamonds business was sold. BHP has retained its iron ore, oil and gas, copper and some coal operations.

10 years ago, on May 5, 2006, BHP Billiton’s share price was $30.47. It’s now $17.83. That’s a 41% loss of capital, and even if we include dividends, BHP’s return to shareholders is minus 15%. Over the same period, the index has returned 0.6%.

Even worse is the fact that BHP has seen its equity rise by US$46 billion over that period, but book value has deteriorated (even before the South32 demerger), and net profit and earnings per share in 2015 were lower than they were in 2006. Return on equity has dropped from above 40% in 2006 to just over 11% in 2015.

Debt has also blown out from US$10 billion in 2006 to more than US$36 billion. Clearly this is a company that has made some giant mistakes – including huge write offs of its oil and gas assets in recent years after the oil price crashed. Given the number and value of writeoffs and one-offs BHP has each and every year, perhaps they should be considered as ‘normal’ operating expenses.

And yet, investors still see BHP as a core blue chip holding. Given the volatility in commodity prices and the inability of reliably forecasting them 5 or 10 years into the future (and hence BHP’s cashflows), it’s almost impossible to value BHP’s shares to work out whether they are good value or not, even after falling substantially.

Foolish takeaway

If BHP is regarded as the best resources company on the ASX, then it casts a poor light on the rest of the resources industry. Management has plenty of work to do before I’d consider investing in BHP.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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