BHP Billiton Limited’s trail of destruction

Credit: Lucas Walters

BHP Billiton Limited (ASX: BHP) has literally destroyed billions of dollars in shareholder value over the past decade – and yet some advisors still insist the Big Australian should be in everyone’s portfolios.

Well, they might be wrong – and here’s the proof.

Over the past 10 years, BHP has written off US$18.5 billion for numerous one-off, exceptional and extraordinary items, including asset sales where the company made profits and losses, writing down the value of its goodwill and the value of the resources and assets purchased.

That includes a whopping US$5.2 billion in 2015 and another US$7.7 billion in the 2016 financial year (FY16).

(US$) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Reported profit 10,450 13,416 15,390 5,877 12,722 23,648 15,417 10,876 13,832 1,910 1,215
Underlying profit 10,154 13,675 15,368 10,722 12,469 21,684 17,117 11,798 13,447 6,471 -6,385
Writeoffs (after tax) gain of $296m $259m gain of $22m $4,845m gain of $253m gain of $2bn $1.7bn $922m $385m $5.2bn $7.7bn
Net debt ($bn) $8.2 $11.0 $8.5 $5.6 $3.3 $5.8 $23.6 $29.1 $25.8 $24.4 $26.1

Source: Company reports

I should also note that accounting rules stop companies from revaluing their balance sheet assets upwards (the opposite of a write-down), so that is slightly unfair on companies. However, every company has to live with those rules and there are valid reasons why companies aren’t allowed to revalue assets upwards.

Another problem is that BHP’s net debt has surged from US$8.2 billion in 2006 to US$26.1 billion in FY16 although net assets have jumped by US$35.6 billion from US$24.5 billion to US$60 billion – mostly through retained earnings (US$28.5 billion).

Profits have shrunk dramatically, and the miner now needs more than twice the assets to produce those profits. As a result, return on equity (ROE), return on invested capital (ROIC) and return on assets are all plunging.

BHP is not the only company making huge write-offs either. Rio Tinto Limited (ASX: RIO), South32 Ltd (ASX: S32) and Santos Ltd (ASX: STO) have all written down the value of their assets by billions in the past year or so.

Foolish takeaway

For those investors still thinking that BHP needs to be in their portfolios, now might be the time to rethink that and look elsewhere for higher quality companies.

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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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