Why investors don’t need to own BHP Billiton Limited shares

Credit: Lucas Walters

Ask a room full of Australian investors who owns shares in BHP Billiton Limited (ASX: BHP) and the likely response will be more than half will put their hands up.

In fact, not owning shares of the big Australian could be even considered un-Australian. The problem for many investors who are part owners in the giant resources company is that the company has wasted billions of dollars of shareholders’ funds over the years and returns – even including dividends have been abysmal.

Since 2006, BHP has delivered shareholders a return of 10.2%, with dividends reinvested. While that beats the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) return of 7.8% over the same period, putting your cash in the bank would have delivered better returns even at record low interest rates we’ve seen in recent times – and without all the risk and volatility.

Even buying Telstra Corporation Ltd (ASX: TLS) shares for the past decade would have delivered a better return – 204%.

Owning the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) would have delivered an average return of more than 100%.

Go back 20 years to 1996 and BHP’s shares have delivered an annual return of 8.5%. But that’s below the long-term market average of around 10%. Holding shares in the big four banks over the same period would have seen investors reap a 13.8% annual return – thrashing the market and delivering 10-baggers for ANZ, CBA and Westpac.

But BHP’s poor performance can mostly be laid at the feet of external factors – commodity prices. When a company has no control over the prices it receives for its products, it has no pricing power. Forecasting commodity prices 20 years into the future I’d say is impossible. Look at how iron ore and oil prices have changed in the past two years.

Factor in management’s poor capital allocation skills which has resulted in many billions in writedowns and shareholders are on a hiding to nothing.

Foolish takeaway

Some advisors might suggest that BHP is mandatory for your portfolio to offer diversification, but there are plenty of other ways to achieve diversification without having to put up with poor returns.

If you really want diversification away from your usual equity holdings – buy some exchange traded funds with exposure to other asset classes such as fixed income, bonds and infrastructure – not BHP.

3 More Rotten Shares to Sell besides BHP Billiton, and 1 to Buy Today

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks. No credit card required.

Motley Fool writer/analyst Mike King owns shares in Telstra Corporation. 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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