BHP Billiton Limited (ASX: BHP) is one of the biggest resource companies in the world.
It has generated and continues to generate huge amounts of tax revenue for Australia. It employs a large number of Australians and has generated significant wealth for Australia. I’m glad BHP exists and it will probably keep operating for many decades to come.
However, just because it’s big doesn’t mean that it’s going to be a great investment.
Here are three reasons why I probably won’t ever be a BHP shareholder:
No control of the price of its product
The nature of being a resources company means that, literally, it sells a commodity.
BHP has to take whatever price it can get for its iron ore and other materials on the global market. It is competing against every single other resource company in the world and if competitors offer iron ore at a cheaper price, then BHP has to reduce prices too or else it won’t sell much.
No control or reliability of demand
Demand for resources is very cyclical in nature and it’s impossible to predict the peaks and troughs.
Owning a company that has earnings which can swing dramatically from year to year is not the kind of investment which would allow me to sleep easy at night.
I like owning companies that have relatively predictable growth in the medium-to-long-term. Companies like InvoCare Limited (ASX: IVC) and Ramsay Health Care Limited (ASX: RHC) are pleasingly easy to predict growth each year.
I don’t like having a large debt hanging over my head. I like to take that approach with most of the companies I invest in too.
If a company has high levels of debt then it could become unsustainable, particularly now that interest rates are rising.
BHP has net debt of US$20 billion on its balance sheet at 31 December 2016, which is a huge figure and management need to keep paying down debt to make it more sustainable in the future.
REA Group, Altium and Class Ltd (ASX: CL1) are all examples of companies that have very safe balance sheets.
BHP is currently trading at 14x FY17’s estimated earnings with a grossed-up dividend yield of 4.22%. This appears cheap on the traditional price/earnings ratio, but its earnings and share price can change a lot, so I wouldn’t invest at this price even if I were interested. I’d want the price to be at least under $20.
For shares that I would be interested in at the current prices, you should check out this report.
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Motley Fool contributor Tristan Harrison owns shares of Altium, Class Limited, InvoCare Limited, and Ramsay Health Care Limited. The Motley Fool Australia owns shares of Altium and Class Limited. 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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