Geographic and product diversification allows BHP stable cash flows.
The majority of revenue is sourced from the relative safe havens in Australia, Europe and North America.
In contrast to many other miners BHP is not burdened with an overweight exposure to any single commodity. Diversification decreases risk and allows BHP consistent cash flows to strategically invest throughout the boom bust cycle, altering its production pipeline as the needs of customers evolve.
Management attempts to leverage scale advantages where possible and ensure that best practices are shared across operations.
BHP is trading with a P/E of 12.51 on current earnings. Earnings are a little more expensive than peer RIO (P/E 11.37) but BHP and other mining stocks have underperformed the ASX (average P/E 14.84).
The analyst consensus is that 2013 earnings will decline 17% from 2012 levels, before increasing 20% in 2014. On expected 2014 earnings BHP looks cheap and trades with a price multiple of 10.54.
BHP pays a fully franked dividend, historical yield is 3.33%/4.76% gross, the forecast dividend payout for 2013 is 3.51%/5.01% gross. BHP only pays out 35% of its earnings as a dividend. This allows the company continually invest in new growth opportunities as they present themselves.
Debt accounts for 35% of equity, interest coverage is a healthy 14x EBITDA.
The balance sheet always boasts healthy free cash flows, current free cash amounts to $1.54 per share.
BHP’s scale and diversity affords it a competitive advantage, unlike smaller miners BHP has the ability to cut costs and delay production to see out the inevitable commodity price lulls.
When the major economies are growing BHP is well positioned to perform.
Research house Lonsec indicates a fair value of $50.00 for BHP; this represents a 48.68% upside. Dividend income is respectable with a gross yield of 5.01% forecast for the year ahead.
BHP is an excellent long-term portfolio component.
For more information on BHP Billiton (BHP) please contact us on 07 4771 4577.