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Commodities are the building blocks of everything, because everything originates from the earth.
Check your physical surroundings. What around you contains the industrial commodities iron, zinc, copper, manganese, silver or aluminum? And what around you is powered by a fuel commodity – coal, oil, natural gas or uranium? I would bet nearly everything.
Commodities are continually in demand, so they will be continually supplied. No company is more proficient at supplying the world with commodities than Australian mining and energy giant BHP Billiton (NYSE: BHP).
BHP is the biggest and most diverse commodities company on the planet. It mines coal, copper, silver and gold in Australia; extracts aluminum, manganese and nickel in South Africa; mines iron ore in Brazil; drills crude oil in the North Sea and the Gulf of Mexico; and fracks oil and natural gas and mines potash in the United States.
Iron ore mining is the largest segment by percentage of revenue generated. It’s followed by copper mining; petroleum production; coal; and aluminum, manganese and nickel mining. In total, BHP’s mining, drilling and fracking operations generated $63.2 billion in trailing 12-month revenue.
Commodities are cyclical. As the cycle goes, so goes a commodities producer’s share price. With commodity prices down, so too is BHP’s share price. But with the share price down, the dividend yield is up – to 5.8%.
Fortunately for income investors, the world’s best commodities stock retains an unfailing commitment to its dividend, which continues to grow despite a challenging business environment. The annual dividend of $2.02 per share (BHP pays dividends semi-annually) in 2011 has grown to $2.48 today.
Efficiency is a key reason BHP’s dividend grows. It enables the company to maintain and grow its dividend through lean years. BHP has relentlessly pruned and edged its capital budget since 2012, reducing it by 40%.
But cost-cutting alone isn’t enough. You still have to produce. On that front, BHP chalked up record production in many of its commodities last year. Company-wide production is up nearly 10% year-over-year. (Of course, it’s receiving less for each unit sold.)
At the same time, BHP continues to pursue avenues of value creation.
BHP has created a new company, South32. It contains BHP’s aluminum, thermal coal, manganese, nickel and silver operations. In short, BHP has carved out roughly 12% of itself to trade as an independent company to be valued on the aforementioned operations.
Despite spinning off a portion of itself, BHP retains its hefty girth. It remains the world’s largest commodities company. It also retains its commitment to its dividend.
According to BHP CEO Andrew Mackenzie, nothing will change post-spinoff.
“We do not plan to rebase our progressive dividend downwards,” Mackenzie said at a recent analysts meeting. “Any dividends from South32 will represent additional cash returns.”
In other words, BHP will maintain its dividend, with plans to keep hiking it every year. That’s good news for income investors.
As for the present, investors can buy the best collection of commodity-producing assets on the cheap. When times are good and commodity prices are higher, BHP shares typically trade at three to four times book value. Today, when times aren’t so good, BHP shares trade at less than twice book value. They haven’t been this cheap in over a decade.
It has also been a long time since BHP has offered a 5.8% dividend yield. In the good times, its shares are bid up and the dividend yield is pushed down to around 2%.
When do you buy the best-run commodity-producing assets? When commodity prices are cheap.
In other words, you buy a high-yield, well-run commodity producer like BHP Billiton now, because it’s also cheap.
Dividends for Every Month of the Year
If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year.
Click here to see the full details of this company in my Dividend Calendar…