BHP (ASX:BHP) share price on watch after earnings beat and record dividend

The BHP Group Ltd (ASX: BHP) share price will be one to watch this morning.

This follows the release of the mining giant's eagerly anticipated half year results.

BHP share price on watch after beating expectations

• Revenue from continuing operations up 27% to US$30,527 million
• Total revenue up 32% to US$33,784 million
• Underlying EBITDA up 46% to US$21,381 million
• Underlying EBITDA from continuing operations up 33% to US$18,463 million
• Underlying profit from continuing operations up 57% to US$9,715 million
• Free cash flow from continuing operations of US$8.5 billion
• Record fully franked interim dividend of US$1.50 per share

What happened during the first half?

BHP was on form during the first half and delivered a 27% increase in revenue to US$30,527 million and a 57% jump in underlying profit to US$9,715 million. Management advised that this reflects higher sales prices across its major commodities, near record production at WAIO and higher concentrate sales at Spence, and favourable exchange rate movements.

This was partially offset by the impacts from planned maintenance across a number of assets, the expected copper grade decline at Escondida, significant wet weather at Queensland Coal, and inflationary pressures. The latter includes higher fuel, energy and consumable prices.

BHP's performance was impacted by COVID-19 once again. In fact, management estimates that it took a US$223 million pre-tax hit from COVID. This comprises US$69 million associated with lower volumes and US$154 million from direct costs.

This couldn't stop BHP from generating significant free cash flow during the first half, which has allowed the board to declare a record fully franked US$1.50 per share interim dividend. At current exchange rates and the latest BHP share price, this dividend alone equates to a 4.4% yield. This also represents total dividends of US$7.6 billion and a 78% payout ratio.

How does this compare to expectations?

Management commentary

BHP's Chief Executive Officer, Mike Henry, was pleased with the half.

He commented: "BHP had a strong first half. We achieved our third consecutive fatality free calendar year. We mitigated the impacts of COVID-19 and significant adverse weather events to turn in a solid operational performance, particularly from our flagship Western Australian Iron Ore business."

"We have announced an interim dividend of US$1.50 per share, bringing total shareholder returns to more than US$22 billion over the past 18 months. Our record interim dividend was supported by our reliable operating performance and continued strong markets for a number of our products."

"We have made strong progress on the execution of our strategy. We unified the BHP corporate structure with strong support from shareholders, we announced and advanced the proposed merger of our petroleum business with Woodside, we progressed our divestments of certain coal assets and we announced the final investment decision for our Jansen Stage 1 potash project. We have also secured further growth options in future facing commodities. BHP is well positioned for the future. We are building on our strong foundations and capital discipline to reshape our business and grow long-term value for shareholders and other stakeholders," he concluded.

Outlook

BHP has warned about industry wide inflationary pressures that are steepening operating cost curves.

Management explained: "Many commodity-linked uncontrollable costs have moved noticeably higher, in some cases to record highs. Labour costs have increased materially due to localised shortages of both general and skilled workers. This partly reflects regulatory constraints on movement across international and state borders."

"We expect cost headwinds due to supply bottlenecks to remain challenging in the 2022 calendar year, with only tentative signs of easing by the end of the period. As the actual recognition of costs tends to lag developments in prompt pricing, these pressures are expected to continue to impact on our cost base in the following calendar year."

Nevertheless, full year unit cost guidance for WAIO and Escondida remains unchanged. Whereas unit cost guidance for Queensland Coal has been increased, reflecting lower expected volumes for the full year as previously announced.