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Why I think BHP shares are a solid blue-chip buy in 2020

It was a good year in 2019 for the world’s largest miner, with BHP Group Ltd (ASX: BHP) continuing to implement a solid consolidation plan focused on offloading underperforming assets, reducing debt and increasing efficiency in operations.

Solid financial performance

BHP’s operating revenue and cash holdings have continued to climb consistently over the last 5 years, even in the face of deleveraging, share buy-backs and generous dividend payments. Revenue metrics across the board have been positive and the mining giant’s earnings before interest, tax, depreciation and amortisation have marched in-step, allowing BHP to maintain a stockpile of over $61 billion in retained earnings. Receivables have continued an upward trend for the past 3 years and there’s room for this to jump even higher with more than $5.5 billion in inventory available to drop into the marketplace when commodity prices are favourable. The resulting adjusted earnings per share (EPS) for the last financial year lifted from $2.49 to $2.72.

Favourable conditions

Moving forward, it looks like the US–China trade stand-off is potentially easing, which should stoke the fires for continued Chinese demand for quality steel. BHP’s other assets are also in favourable environments. Copper is performing strongly, with prices currently hovering around the 10-year average of US$3 per pound, plus strong short-to-medium term demand for coal and petroleum.

Potash represents an exciting opportunity for the future, with BHP currently investing in its Canadian Jensen Potash project, expected to receive approval in early 2021. Potash is a salt which contains high levels of potassium and could be another gateway in the Chinese market with to the lack of viable farming land and an exploding population. Management is continuing its quest to squeeze the remaining slack from existing operations and reinvest into project expansions, mine- and logistics-infrastructure and focus on improving the upstream value chain for its points of focus.

Returning the riches to shareholders

FY2018–19 was a great year for BHP shareholders in terms of dividends, with a total fully-franked payment of $4.76 per share, and a grossed-up dividend yield of 6.51%. As a rule, the company has a mandate to maintain a dividend payout ratio of at least 50%, which is a strong positive for shareholders given the balance sheet stability. Not only is BHP unafraid to return capital to the owners if it doesn’t see better alternative available, management is also proactively reducing the share count through buy-backs as an additional form of returning value to shareholders while highlighting a belief internally that the stock is undervalued by the market.

New Sheriff in town

As the new year came, so did new leadership for BHP under incoming-CEO Mike Henry. Outgoing chief Andrew Mackenzie had done a solid job of steadying a wayward ship which had set its sights on growth regardless of the cost, with the organisation now in a strong position for Henry to continue its progression. Henry is a highly regarded appointee with over 30 years in the resources industry, 13 of those internally, most recently serving as the President Operations, Minerals Australia.

Foolish takeaway 

While the S&P/ASX 200 (INDEXASX: XJO) has had a terrific run up in 2019, some may be getting nervous about the sluggish economy, both at home and abroad, triggering a potential reversal. As seen through the GFC, Australia is a two-headed economy with mining pushing forward in environments where others wane. As a hedge against a market retreat, or as a dividend play, I think BHP could be a great blue-chipper to add to your portfolio.

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Motley Fool contributor Adrian Harling has no position in any of the 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 Scott Phillips.

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