BHP admits dividend pledges and mining don’t mix

February 23, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

BHP Billiton has accepted that dividend pledges and natural resources don’t mix. The world’s largest miner has slashed cash returns to shareholders and followed rival Rio Tinto in scrapping a “progressive” policy. It’s about time. Promising that payouts will only increase or hold steady is daft in such a cyclical sector. And consistency matters less than safeguarding BHP’s balance sheet.

Reporting on Feb. 23, the group slashed its interim dividend by 74 percent to $0.16 a share. From now on, BHP says it will take a more flexible approach. Payments will be set relative to earnings and it will distribute at least half of net profit before one-offs.

The retreat is a big deal. BHP lavished $6.5 billion on shareholders in the year to last June. That is roughly equivalent to one-thirtieth of the entire $186 billion which, according to Henderson data, was paid by British and Australian companies in 2014.

And yet, BHP Chief Executive Andrew Mackenzie’s decision will surprise almost no-one. A double-digit yield on BHP stock showed the market considered the payout excessive: the reduced dividend implies a more sustainable annualised yield of 2.8 percent, Jefferies analysts reckon.

Peers such as Anglo American, Glencore and Conoco have already reduced or halted dividends. And earlier this month Standard & Poor’s cut BHP’s prized credit rating by a notch to single-A, and warned it could cut again, barring a new approach to allocating capital.

A strong balance sheet matters in hard times, by keeping investors onside and debt costs down. It also creates a bit more room to pounce on bargains should others become forced sellers. The Anglo-Australian giant is also freeing up cash by reducing capital expenditure plans for the next two years by $3.5 billion to $12 billion.

In industries that enjoy steady, predictable growth, progressive dividends can impose capital discipline on companies that might otherwise be tempted to spend spare cash. But the promise of increased payouts didn’t stop miners splurging in the good times. Mining is simply too boom-and-bust. However attractive the idea of a predictable payout might be to investors, it is impossible to reconcile with the wild rides in the prices of iron ore, copper and oil.

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