BHP: payout restraint would resolve wriggle room riddle

It can take a century or more to become a one-year wonder. Shares in BHP, a business founded in the 1800s, have outrun peers with a 40 per cent return over the past 12 months. Thank bosses — and activists — who refocused a vast portfolio built over decades.

The new structure should continue performing well even as the commodity boom subsides. But fat returns are set to attenuate.

Since 2015, BHP has spun out minerals grab bag South32, deconsolidated remaining oil and gas production, and swapped a dual listing for a primary quote in Sydney. Tuesday’s full-year results underscored that this is now an Australian miner of iron ore, copper and coal.

That description is admirably simple. There is more nuance to BHP’s 10 per cent dividend yield. The share price, by implication, is low. But everything is relative in the cyclical world of mining. BHP’s enterprise value of nearly 6 times forward ebitda beats that of diversified peers.

The scale of the yield also signals that the dividend is seen as unsustainable. This, in turn, points to investor caution towards prices for iron ore, copper and metallurgical coal.

Over the next few years, expect BHP’s free cash flow to slide as it raises capital expenditure. Some of the money will go to a Canadian potash fertiliser project, Jansen. Chief executive Mike Henry is enthusiastic about the potash mine, scheduled to open in 2026. BHP — at some risk to its much-vaunted focus — believes it will produce earnings uncorrelated with those of other divisions.

Estimates service Visible Alpha forecasts group annual mean free cash flow of $12.9bn to June 2025. Dividend payouts should average about $12.8bn. That limits Henry’s financial wriggle room.

It also leaves him dependent on iron ore and copper operations accounting for 80 per cent of group ebitda. As economies normalise in the wake of lockdowns and rate rises, so will demand for these commodities. Expect Henry to let the dividend drift before he slashes investment. Investors, like BHP itself, should think in multiple years, not months.