Is it too good to be true, a dividend yield of 12.97% at the end of trading on Thursday, July 28?
Normally, we associate such dividends with dodgy companies with spiraling share prices. And we do not expect those companies or their dividends to last for long.
BHP Group Ltd. (BHP, Financial) is not one of those companies, though. It boasts outstanding fundamentals and has a long history in the mining business.
About BHP
The roots of this Australian company go back to 1851, when a large deposit of tin was found on Billiton Island in Indonesia. Its other parent company began with the establishment of a silver, lead and zinc mine in Broken Hill, Australia.
In 2001, Broken Hill Proprietary and Billiton agreed to merge. Since then there have been further moves, but the combined company BHP carries on.
With a market cap of $193.44 billion, it is one of the largest mining companies in the world, second only to Glencore PLC (LSE:GLEN, Financial).
Its major operations produce iron ore, copper, nickel and metallurgical coal. Operations also produce other minerals, including potash, which is a key ingredient in fertilizer.
It reports in halves, rather than quarters, and also pays dividends twice a year. Fiscal halves begin on July 1 and end on Dec. 31, or close to those dates.
Fundamentals
As noted, BHP is no fly-by-night company. Rather, it is a giant not only within the mining industry, but among all businesses. And few other companies can match its fundamentals, as summarized by its GF Score of 95 out of 100. With the five factors ranking highly across the board, the company has great outperformance potential going forward.
Dividends
As the table shows, both the trailing and forward dividend yields sit at 13.09% and, not surprisingly, they lead dividend-paying companies in the metals and mining industry. In the case of the trailing dividend yield, BHP has a higher yield than 94.35% of companies in the industry.
From a historical perspective, this chart shows the yield over the past decade:
To show what’s behind the chart, here are the annual and semi-annual data on BHP’s dividend yield:
Digging deeper, the company used to pay between $1 and $2 per share in its March and September distributions. That changed with the September 2021 distribution:
- September 2020: $1.10 per share
- March 2021: $2.02
- September 2021: $4.00
- March 2022: $3.00
- June 2022: $7.74
Why the change? Let’s first look at the company's dividend policy, which states: “The BHP Group Limited dividend policy provides a minimum 50% payout of Underlying attributable profit at every reporting period. The Board will assess, every reporting period, the ability to pay amounts additional to the minimum payment, in accordance with the capital allocation framework.”
This is the capital allocation strategy, as shown in this slide from its first-half earnings presentation:
We can also look at the 50% of underlying attributable profit (similar to earnings per share without non-recurring items). Here are per-share results for the past three years and a half years:
- 2019: EPS without NRI = $3.33
- 2019: Dividend = $2.36 (70.09% of EPS)
- 2020: EPS without NRI = $3.14
- 2020: Dividend = $2.86 (91.08% of EPS)
- 2021: EPS without NRI = $4.55
- 2021: Dividend = $3.12 (68.57% of EPS)
- 2022 first-half: EPS without NRI = $6.28
- 2022 first-half: Dividend = $6.02 (95.85% of EPS).
On a trailing 12-month basis, earnings per share without NRI was up to $6.28, while the dividend almost doubled to $6.02.
BHP’s board of directors has been generous with shareholders over these three and a half years, allocating much more than the minimum of 50%.
To put these payments into perspective, consider these numbers from the financial statements for July to September 2022:
- Cash flow from operations: $31.14 billion
- Dividends: $15.16 billion
- Capital expenditures: $5.54 billion
So it appears that BHP is not sacrificing capital expenditures for dividend payments. Although the dividend has taken up as much as 96% of earnings per share without NRI, the board has not cut the dividend to increase capital expenditures.
Share price
The recent decline in the share price has helped drive up the dividend, but as the proportions show, it has not been the only factor:
It also has grown because of higher earnings per share and higher dividend payments.
Cyclicality
BHP operates in a commodities environment, where prices swing up and down according to external factors such as economic conditions. Investors, therefore, will want to consider the company’s exposure to potential revenue and earnings swings.
In its annual report for 2021, BHP made a couple of statements that suggest it is not overly affected by these swings.
Regarding its debt, it stated, “Recognising the cyclical volatility of operating cash flows, the Group has defined minimum target cash and liquidity buffers to be maintained to mitigate liquidity risk and support operations through the cycle.”
In the chief financial officer’s review, David Lamont wrote, “Based on the consistent performance of the past five years, and despite the cyclical nature of our industry, our earnings and returns are reflective of our high-quality stable business.”
Conclusion
Is BHP an exception to the rule that high dividends mean danger for investors? The data suggest it is.
It is just about the opposite of a flaky company. BHP has grown for nearly 200 years, it has one of the best fundamentals scores of any company anywhere and its dividends are based on a clear and articulated policy.
Income investors may wish to dig deeper, as this might be called a blue-chip company with a very high yield. The sheer level of the yield should make us cautious, but the possibilities also make us curious.
