BHP (ASX:BHP) dividend in spotlight amid China iron ore cutback

Is it worth holding BHP for dividends in the wake of weaker iron ore prices?

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The BHP Group Ltd (ASX: BHP) dividend could be something to keep an eye on following the recent collapse in iron ore prices.

What happened to iron ore?

Iron ore prices have managed to defy gravity, holding well above the US$200/tonne level between May and July this year.

These sky-high prices would support a generous interim BHP dividend of $1.311 on 4 March. However, prices would rapidly deteriorate in August as a result of steel production mandates in China.

China is hoping to limit production on its steel mills to ensure production is no more than 2020 figures.

Steel output grew by more than 12% in the first half of this year, which suggests a significant cutback could take place in the second half.

This news would see iron ore spot prices nosedive from highs of around US$220/tonne in July to less than US$170.

Despite the sudden collapse of iron ore prices, BHP would hold its ground, edging just 2.20% lower in August.

In contrast, pure play iron ore miners such as Fortescue Metals Group Limited (ASX: FMG), Champion Iron Ltd (ASX: CIA) and Mount Gibson Iron Limited (ASX: MGX) have all tumbled more than 15% this month.

Is the BHP dividend at risk?

The BHP dividend could be at risk in a world where iron ore prices continue to weaken.

The Australian reported commentary from Morgans Financial analyst Adrian Prendergast who said “the share prices of the big iron ore miners are likely to come under pressure as they trade ex-dividend”.

“We still view the value downside vs. big dividend return as a trade-off that on a total return basis is skewed to the downside for the big iron ore miners,” Prendergast said.

He added that “[investors] looking to lighten positions opportunistically in the big miners should consider waiting to see their full-year results, but then trim before these stocks go ex-dividend”.

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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