Wednesday newspaper share tips: BHP Billiton's welcome dividend policy

BHP Billiton’s new dividend policy is a welcome return of humility to the mining sector, The Times’ Tempus said on Wednesday.

The mining company adopted a new more cautious payout policy as it hunkered down for what it believes will be a prolonged period of low and volatile commodity markets.

In line with a new dividend policy designed to protect the balance sheet, and net cash flow shrinking 45% to $5.3bn, BHP chopped its interim payout by almost three quarters to 16 cents from 62 cents a year before.

The Anglo-Australian colossus also cut its capital and exploration spending by 40% to $3.6bn, which combined to help keep its half-time net debt at $25.9bn in line with consensus forecasts for the six months to 31 December.

Tempus pointed out that the company now plans to allow the dividend to go up or down along with profits instead of returning to a progressive dividend.

It said because the company cut its dividend, it didn’t have to use debt to pay investors, which gives the company flexibility.

“By keeping net debt at about $26 billion, within three times underlying earnings (the rough yardstick the agencies look for), BHP can pounce if a world-class mine comes on to the market after being prised from the hands of a struggling peer.”

But Tempus warned that as the company looks for efficiencies in its management structure, it won’t make a real difference if commodity prices continue to fall.

“In the case of copper, oil and gas, prices will have to rise if the global economy keeps growing.

“The outlook for iron ore and coal looks less promising. Yet BHP has perhaps the lowest-cost iron ore mines in the world and its coal assets are in the top 25 per cent.”

However, the column highlighted that the main unknown for the FTSE 100 company is the cost of the Samarco disaster last year.

Despite that hanging over its head, Tempus advised to hold the shares.

“BHP’s focus on running its mines more efficiently will pay dividends, but it represents a lottery until the Samarco liability is clarified.”

Over in The Telegraph, Questor was prophesising about what to do with Royal Bank of Scotland ahead of its results on Friday.

It noted that banking shares have been clobbered so far this year, prompted by weakness in Asia, which hit HSBC and Standard Chartered in their results out earlier this week.

But Questor said there shouldn’t be too many surprises in RBS’ results, after it came out in January warning it will make another loss, anticipated to be around £2bn.

“The key factor keeping RBS on the wrong side of breaking even this time around is more provisions for payment protection insurance compensation and legal bills, as well as covering the expected impact of low interest rates,” the column said.

However, it also noted that RBS doesn’t have much exposure to Asian markets, as its post-financial crisis plan was to focus on the UK.

“The bank’s recovery from the financial crisis may have been dreadfully slow but its turnaround plan is very gradually taking hold and the bank can start concentrating on growing both lending and profits.”

But with impending fines from US authorities over the sale of toxic mortgage-backed bonds before the financial crisis and a large chunk of cash set aside, Questor said investors have every right to be worried but rated the shares at ‘hold’.

“Even then, the precise timing of any dividends is highly uncertain, and the bank’s future also depends on the UK economy’s ability to keep on growing faster than other rich nations.”