The BHP Group Ltd (ASX: BHP) share price dropped almost 4% over the past year, underperforming the S&P/ASX 200 Index (ASX: XJO) which rose by 6.8% during the same period.
This underperformance extends over the longer term as well. Over the last five years, BHP shares have gained 5.5%, whereas the ASX 200 has increased by 14.6%.
The primary reason for the share price decline is the drop in global commodity prices, particularly for BHP's key metals: iron ore and copper.
Iron ore prices fell from US$144 per tonne in January 2024 to below US$100 per tonne in April 2024 due to ongoing weakness in China's property and industrial sectors. While prices have recovered somewhat, the current price is around US$108 per tonne, down 25% from its peak.
Copper prices also took a breather after reaching near-record highs of US$10,890 per tonne in May 2024 and are now trading at US$9,483 per tonne.
BHP shares offer a fully-franked dividend yield of 5.44% at the current share price. Considering the tax benefits from franking credits, this translates to generating an additional $1,000 of monthly passive income (before tax) by investing less than $180,000 today.
Dividend history
While BHP's current dividend yield is attractive, its value hinges on the consistency of its dividend payments. Let's review BHP's dividend payment history.
| Dividend per share (AUD) | Franking | |
| FY13 | $1.20 | 100% |
| FY14 | $1.31 | 100% |
| FY15 | $1.69 | 100% |
| FY16 | $0.40 | 100% |
| FY17 | $1.06 | 100% |
| FY18 | $1.59 | 100% |
| FY19 | $1.92 | 100% |
| FY20 | $1.75 | 100% |
| FY21 | $4.03 | 100% |
| FY22 | $4.63 | 100% |
| FY23 | $2.61 | 100% |
| TTM | $2.35 | 100% |
Like any mining stock, BHP's earnings are subject to commodity cycles, which can significantly impact its dividend payments. For instance, in FY16, the dividend per share dropped sharply from $1.69 to 40 cents and took three years to recover to its previous high.
However, long-term shareholders who held onto its shares through the ups and downs of mining cycles have generally seen their dividends grow over time.
All this time, BHP has offered 100% franking credits on its dividend payments, which is an added bonus for tax-conscious investors.
Valuations
No matter how high the dividend yield might be, it's equally important to protect your invested capital. Watching the share price decline after purchasing is never a pleasant experience.
Let's examine BHP's current valuations using FY25 estimates from S&P Capital IQ. At present, BHP shares are valued at:
- A price-to-earnings (P/E) ratio of 10x, compared to its historical range of 7x to 20x.
- A price-to-book (P/B) ratio of 3x, compared to its historical range of 0.9x to 4x.
Note that the historical trading range excludes FY16 valuations, which appear to be outliers, with a P/E ratio as high as 53x and a P/B ratio of 8x.
Compared to BHP's usual trading ranges, some may argue that the current P/B ratio suggests a potential downside. Economic uncertainties always loom, so it's crucial to consider the risks involved.
But, all things considered, I can safely say that BHP's valuation multiples are near or below their mid-points in terms of PER and PBR.
Foolish takeaway
For long-term dividend investors, I think BHP's current share price offers a compelling opportunity. As a global leader in an essential industry with a consistent dividend history, BHP provides attractive dividend yields at reasonable valuation multiples.
