By Rhiannon Hoyle
SYDNEY-- BHP Billiton Ltd. sought to satisfy yield-hungry
investors with the promise of higher returns despite a sharp fall
in first-half profit, reinforcing a shift among the world's largest
mining companies to give more cash back to investors as a
decadelong commodities boom fades.
BHP on Tuesday pledged to maintain or increase its dividend even
after a proposed demerger later this year which will see the
world's largest miner by market value hive off some unwanted assets
into a separate company called South32, that analysts estimate will
be worth around US$15 billion.
Like its peers in the mining sector, BHP has been shelving
expansion projects and cutting capital spending after a supply glut
emerged in many commodities, including iron ore and oil, two big
contributors to the company's earnings. But despite a 47% fall in
first-half net profit, to US$4.27 billion, it still raised its
interim dividend by 5% to US$0.62 a share.
"If our shareholders approve the demerger, we do not plan to
rebase or lower this dividend, which implies, all other things be
equal, a higher payout ratio," BHP Chief Executive Andrew Mackenzie
said. "And that's before you consider that South32 will be set up
to deliver additional cash returns through dividends to their
shareholders, which, of course, is all our shareholders at the
moment."
Cautious mining executives are now looking to woo fund managers
with beefed-up payouts instead of promises of endless growth,
following a string of multibillion-dollar write-downs caused by the
slump in prices of key commodities. Confidence in mining companies
has also been shaken by signs of moderating resources demand growth
from China.
Anglo-Australian miner Rio Tinto PLC recently said it would buy
back US$2 billion of its shares in 2015 and pushed up its annual
dividend 12%, while hinting it could increase returns in
future.
Already last August, Switzerland-based miner-and-trader Glencore
PLC announced a US$1 billion buyback and raised its dividend by
11%. "Growth for growth's sake isn't for us," its Chief Executive
Ivan Glasenberg--himself a major shareholder--declared.
Some miners have raised eyebrows by clinging onto dividends even
as their profits fall sharply.
Anglo American PLC, the world's fifth-largest diversified miner
by market value, this month said it would maintain its full-year
dividend at US$0.85 a share, despite recording a US$2.51 billion
annual loss because of multibillion-dollar write-downs against its
operations.
For sure, miners are having to weigh calls from shareholders for
higher cash returns against their desire to maintain a strong
balance sheet. BHP's Mr. Mackenzie has made it clear he wants to
keep what the company calls a 'solid-A' credit rating, and has said
a share buyback isn't an immediate priority. The company will
reduce its capital spending by 17% to US$12.6 billion in its fiscal
year to June--15% below its own earlier estimates.
Still, Mr. Mackenzie said he's confident BHP can cut costs and
bolster cash generation after the planned demerger.
"I think we have pitched it correctly," Mr. Mackenzie said of
BHP's capital management plans. Shares in the company, which is
listed in both the U.K. and Australia, closed 2.9% higher in
Sydney.
Still, not all investors are enamored by the shift in strategy
among the biggest miners.
"They are basically feeding the market what it wants at the
moment but, in my view, you are throwing away capital that could be
used for future advancement," said Robert Hook, a Melbourne-based
fund manager at SG Hiscock & Co. He sold his holdings in BHP
last month.
Some investors say it is difficult to gauge exactly how BHP's
capital-returns program will proceed until there is further clarity
on the shape of the company post-demerger. BHP is set to release
more details on the spinoff next month.
The assets BHP plans to jettison were among the strongest
performing in the first half. Its aluminum, manganese and nickel
division, that will form the rump of the new South32 company, has
been benefiting from higher prices and lower costs. The division
more than doubled its earnings before interest, taxes,
depreciation, and amortization to US$1.07 billion.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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