Are BHP Billiton Limited shares about to return to $14?

Credit: Lucas Walters

Are investors betting on a fall in the BHP Billiton Limited (ASX: BHP) share price?

They certainly could be. BHP’s shares have fallen almost 3% since the close of trading on Friday, including a minor fall today.

That comes despite the iron ore price climbing above US$80 a tonne overnight for the first time in more than two years, according to data from The Metal Bulletin. It’s up nearly 15% in the past five sessions!

Indeed, it has been a remarkable turnaround for the commodity. Earlier in the year, iron ore was stuck in a downwards spiral that saw it trading for less than US$40, with many pundits forecasting further declines for the metal.

As you can see in the chart below, iron ore has more than doubled in price since then, with BHP’s share price largely mirroring the commodity’s gains since the beginning of the year. BHP’s shares hit a low of just $14.06 in January and are now fetching $25.75.

Sources: The Metal Bulletin, Google Finance, author's own chart

Sources: The Metal Bulletin, Google Finance, author’s own chart

While there are some in the market who believe iron ore could continue its meteoric rise in the near future, there are also many who are questioning the rally’s sustainability.

Indeed, iron ore has received a significant boost since the election of Donald Trump as the next president of the United States of America thanks to his ambitions to invest heavily in new infrastructure.

But right now, it is unclear how much will be invested, or what the projects will actually involve, adding a real sense of speculation to the recent rally.

What’s more, the CEO of BHP’s rival Fortescue Metals Group Limited (ASX: FMG) has even questioned the recent rally. As reported by The Australian Financial Review:

“Fortescue CEO Nev Power jokes he always finds it so much easier to predict the past than the future. He still thinks there’s no fundamental change to the supply-demand equation for iron ore from China and that the recent price increase is more of a short-term market fluctuation.”

According to The AFR, Power also believes the commodity will quickly return to “oscillating between $US$40 and $US60 a tonne”. A return to US$60 a tonne would likely weigh on BHP’s share price. A collapse to US$40 could tear it to shreds.

BHP Billiton has done a great job cutting costs across its business, as have Fortescue and Rio Tinto Limited (ASX: RIO). BHP is also diversified across other commodities which would help in the event that iron ore does retreat (assuming they don’t all collapse as well), but it’s still a risk investors ought to be aware of.

That’s one reason why the shares may be falling. That’s not to say they won’t climb any higher from here, but if I was a shareholder of BHP Billiton, I’d be feeling cautious…

Although BHP Billiton shares have propelled investors' portfolios higher in 2016, that's not to say the shares will continue doing so. Investors may want to branch out and take a look at some of the market's other quality blue-chip businesses.

Big, Fat, Dividends

This company's dividend is almost the stuff of legends. Its reliable cash flows support a high payout ratio, and the company's stash of franking credits are the cherry on the top of the dividend cake. Based on the last 12-months of dividends, shares are offering a fully-franked 6.5% yield, which grosses up to a whopping 9.3%, when those franking credits are included.

Discover out the name of this blue chip share along with 2 others in our new FREE report "The Motley Fool's Top 3 Blue Chips Stocks For 2017."

Click here to receive your copy.

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.

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.