The Rising Influence of Rising Affluence

[DewDiligence]

BHP’s Blast From the Past

[This piece from the WSJ is unduly critical, IMO, but there is some truth here.]

http://online.wsj.com/article/SB10001424053111904787404576528332081430892.html

›AUGUST 24, 2011, 12:28 P.M. ET
By ANDREW PEAPLE

BHP Billiton's record earnings for the year ended June 30 already feel like relics of a bygone age. Shares in the world's largest miner by market capitalization have slumped 21% since then, caught in the global downdraft. That might seem poor reward for a company whose earnings rose by 86% year-on-year to $23.6 billion, as reported Wednesday. But markets fancy themselves clairvoyants, not historians. And BHP's results add to the impression the best of times have passed for global miners.

Like its peers, BHP benefited from rising prices for commodities such as iron ore and copper, which boosted last year's earnings by $17.2 billion. But BHP is more diversified than the likes of Rio Tinto and Vale, with its acquisitions of Petrohawk Energy and other shale gas assets meaning energy will soon contribute a third of its earnings. Alone among its peers, BHP's current production across its range of commodities is higher than before the financial crisis, helping it generate operating cash flow of $30.1 billion last year, a 78% year-on-year rise.

Still, there are question marks over how BHP is spending that cash. The miner bought back $10 billion worth of its own shares between mid-November and late June, paying $41.4 per share on average [i.e. $81.80 per ADR, which represents two ordinary shares]. With its shares now trading about a quarter below that level, BHP's buyback program is Exhibit A for critics arguing companies habitually overpay for their own paper. The $15.1 billion Petrohawk buy, meanwhile, involved BHP paying a 65% premium for a company amid a U.S. gas supply glut [#msg-65211152].

Investors arguably deserved a more generous increase in the company's annual dividend instead. The absolute payout has gone up by 16.1%, but still equates to just 26% of underlying earnings, compared with 39% the year before. BHP says this dividend level is consistent with capital expenditure plans amounting to $80 billion out to 2015, and maintaining its single-A credit rating. But the lower payout ratio suggests BHP recognizes the outlook is more uncertain, with mining costs rising and commodity prices coming off the boil. BHP is still better-placed than its rivals, but it will take a while for the stock to reverse its summer drubbing.‹