BHP Billiton: Profits down 5.5%, dividend up 20%, but commodity prices fall and demand weakens

BHP Billiton Limited (ASX: BHP), the world's largest mining company by market value, announced a 5.5% fall in net profit, …

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published February 8, 2012 10:50 am AEDT

BHP Billiton Limited (ASX: BHP), the world's largest mining company by market value, announced a 5.5% fall in net profit, down to US$9,941m, although revenues increased by 9.7% to US$37,480m.

The company said that prices for many of its products declined amid concerns surrounding European liquidity which culminated in a general deterioration in commodities demand. It expects volatility to persist due to the European debt crisis and general weakness in manufacturing and construction sectors in its key markets are both going to weigh on customer behaviour and sentiment.

BHP also expects steelmaking raw materials demand to slow, especially in China, however it expects this to be partially offset by robust growth in machinery and transportation sectors, which should support iron ore and coal prices.

Net debt has risen to US$21.5bn, an increase of US$15.6bn since 30 June 2011, mainly due to the acquisition of Petrohawk Energy for US$12.1bn.

BHP also announced an increased dividend payment of US 55 cents per share, up 20% over previous corresponding period.

Double Whammy
BHP is feeling the double whammy effects of a slowdown in demand from China & India, and falls in commodity prices. Despite that, BHP has US$27bn in growth projects in execution around the world, and is expanding more and more into energy products.

The majority of BHP's EBIT (Earnings Before Interest and Tax) comes from Iron Ore (49%), while petroleum, base metals (copper, nickel, zinc and lead) and coal are significant contributors to its earnings, as you can see from the chart below. Any major fall in the price of iron ore will have a significant impact on BHP's earnings.

In the short term, BHP expects continued weakness and volatility, so any thoughts of topping 2011's US$23.6bn in 2012 have been dashed. I expect 2ndhalf 2012 net profits to be lower than the 1sthalf due to lower commodity prices and decelerating demand for its products.

In the long term, BHP expects demand for its products to grow as urbanisation and industrialisation in China, India and other emerging economies drives demand for its products.

The Foolish bottom line
At the current price of A$37.57, and trading on an historical PE ratio of 9.55, you certainly can't go past BHP as a long term investment if you want exposure to resources and energy.

BHP also offers more diversification than either Rio Tinto Limited (ASX: RIO) or Fortescue Metals Group Limited (ASX: FMG). Both Rio and Fortescue are predominantly iron ore miners.

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Motley Fool contributor Mike King doesn't own shares in BHP. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

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