Shares of diversified miner BHP Group Ltd (ASX: BHP) were rangebound today and finished flat at $40.15 apiece.
Meanwhile, the benchmark S&P/ASX 200 index (ASX: XJO) finished down more than 120 basis points on the day at 6,677.
Image source: Getty Images
Why were BHP shares defensive today?
While today was a day in the red for the ASX 200, it wasn't such a sad story for the S&P/ASX 200 Materials index (ASX: XMJ).
It finished just 65 basis points down, extending a period of volatility for the materials basket.
However, the market is also undergoing somewhat of a 'reset' now with the Reserve Bank of Australia (RBA) committing to the warpath of containing inflation.
That means a 'flight to quality' amongst risk assets, seeing more defensible assets such as the US dollar and defensive equities catch a strong bid in 2022.
In fact, the quality 'factor' has been seeing good results this year.
"Research from broker Ausiex shows that the traded value of quality-related stocks and exchange-traded funds is up 13.5% compared to last year," The Australian Financial Review reports.
According to Morgan Stanley Capital International – a leading provider of financial indices and exchange-traded funds (ETFs) – the quality factor is well positioned to outperform in the current investment landscape.
The MSCI Quality Indexes are designed to reflect a quality growth investment strategy by identifying stocks with historically high return on equity, stable year-over-year earnings growth, and low financial leverage.
MSCI 2022
As seen on the chart below, from the period of October 1991 to date, BHP historically tends to move in close unison with the benchmark index . The blue line in the bottom frame further indicates this positive correlation.
However, as investors shift up in the quality spectrum in 2022, it's names like BHP that tend to stand out. A deeper dive into the numbers shows us why.
First is that BHP shares trade at just 7.26 price-to-earnings (P/E) ratio, only a step ahead of the GICS Metals and Mining Industry's median of 6.7 times.
BHP also printed $25.21 million in company-reported free cash flow in FY22 whilst delivering a 44% return on its invested capital.
It also recognised a 34% net profit margin, up more than 10 percentage points from the year prior.
As a result, the company enjoyed a 43% return on equity (ROE) in FY22, putting it well ahead of rival mining giants like Rio Tinto and Fortescue.
The share also trades at 3.1 times book value, meaning the investor ROE is 13.8%. Meantime, BHP also generated 64 cents for every $1 invested into its asset base last year as well.
These impressive results saw the company reduce its debt load from $20.9 billion down to $16.42 billion from FY21–FY22. Debt now makes up just 17.2% of total assets, down from 26% back in 2017.
According to Refinitiv Eikon data, the consensus of analyst estimates also has it to deliver an 8.16% forward dividend yield at the current share price.
However, 11 out of the 20 analysts covering BHP shares say it is a hold right now, versus 9 saying to buy, per Refinitiv.
The consensus price target is $43.04, implying a small amount of upside potential if correct.
Meantime, BHP shares have gained more than 19% over the past 12 months.
