Why BHP Billiton Limited could boost its dividend by more than 60%

Credit: Lucas Walters

BHP Billiton Limited (ASX: BHP) could significantly increase its dividend payout to shareholders this year following a surge in iron ore and coal prices.

Indeed, the Big Australian miner brought an end to its controversial ‘progressive dividend policy’ in February this year off the back of plummeting commodity prices. Instead, it adopted a new dividend policy which would provide a minimum 50% payout of underlying attributable profit at every reporting period.

Given the inability of miners to control the prices of the commodities they produce, this new policy is widely considered to be a more sustainable approach to returning cash to shareholders. It would allow the miner to distribute less cash at the bottom of the cycle and more when rising commodity prices allow it to.

While commodity prices were expected to continue falling earlier this year they have instead provided a nice surprise to the upside. Iron ore retreated 6.5% overnight but is still fetching US$72.68 a tonne, according to The Metal Bulletin, compared to a low of around US$38 late in 2015.

Similarly, coal prices have soared as a result of policies set by China that limit Chinese coalminers to working 276 days per year, thus restricting supply. Oil prices remain well below their high levels from 2014, but have rebounded substantially since their lows from earlier this year as well.

BHP Billiton’s four most important commodities are iron ore, coal, copper, and oil, so a recovery in those resources’ prices will be a boon for BHP. Better yet, the miner has been aggressively reducing costs across its business units which will see much of that revenue fall to the company’s bottom line. And that could well translate to greater dividends.

As highlighted by The Australian Financial Review, market consensus according to Factset suggests the miner could pay a dividend of US49 cents for the year, which is equivalent to AU65 cents at today’s exchange rate. It would also mark a 63% improvement on the US30 cent dividend distributed by BHP for financial year 2016.

While this news bodes well for BHP, it could also bode well for Rio Tinto Limited (ASX: RIO) shareholders as well.

There is no doubt that the recent run-up in commodity prices has been a welcome breath of fresh air for our miners, but it is important that investors don’t get too ahead of themselves. There are signs that suggest some of the gains experienced by the commodities are unsustainable in the long-run, which could explain why more production hasn’t come online to share in the profits.

BHP’s shares have gained almost 75% since they bottomed out around $14 earlier in the year, but while they could still climb higher in the near-term, investors ought to be cautious.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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