From hosting the Athens Olympics in 2004, to winning the EUFA Euro Football Cup in 2008 and then going on to create Eurozone contagion fears in 2012, it seems Greece has consistently been in the headlines for one reason or another. Recent events are no different, with Greece again in the news for its historic referendum rejecting the International Monetary Fund's (IMF) terms for a new bailout proposal.
In 2004, when Greece first started making news, BHP Billiton Limited (ASX: BHP) was in a growth phase of production amidst the mining boom. Its share price soared from around $12 to almost $45 in three years. Just before the Global Financial Crisis hit, BHP shares reached an all-time high of $48.70 but have since fallen, trading in a range of $30-$39 for the last few years.
Amidst the current Greek crisis, BHP's shares have fallen to prices I believe make them a compelling buy today.
Declining commodities
Following its spin-out of South32 Ltd (ASX: S32), BHP's shares have fallen with dwindling spot prices in iron ore, coal, copper and crude oil — the four pillars that the 'new' BHP relies on for earnings. The commodities downturn has arguably caused pressure on BHP's forecast revenues, with some analysts implying that BHP's FY16 revenues will decrease by 15% if prices fail to recover.
Defensive earnings
While the decline in commodity prices will wreak havoc on BHP's top-line results, its size and scale gives it defensive characteristics within the resources market. Through years of capital expenditure, BHP has increased production in all its key commodities to volumes that make it either the cheapest or second cheapest producer in the market. These economies of scale provide BHP a buffer against competitors when they produce more and flood the market with supply.
As we are currently experiencing, the increased supply generally outstrips demand, causing a decrease in commodity prices and eventually pricing out higher cost producers. An example of this would be Atlas Iron Ltd (ASX: AGO), which recently issued a capital raising to stay afloat.
Applying these principles of supply and demand to BHP, it becomes obvious that as one of the cheapest producers in its core markets, BHP will outlast higher and marginal cost producers. Therefore, when demand increases or supply decreases (because the high-cost producers have left the market), BHP should stand to benefit with increased free cash flows.
Dividend yield
Admittedly, this stabilisation could take years to happen; however, I see BHP as a top buy today because of its current dividend yield. Its board maintains that the divestment of South32 and declining commodity prices have not jeopardised BHP's ability to maintain its progressive dividend policy. If that is true, BHP stands to deliver a fully-franked annual dividend of USD$1.24 this year, placing it on an expected gross yield of 7% at current prices (in USD).
For Australian investors, this will be even higher in local currency with further declines in the Australian dollar increasing this yield.
Foolish takeaway
Although the crisis in Greece could create severe short-term implications for world markets, BHP's scale and leverage over existing operations means it is well-placed to withstand the current price slump in its key commodities. Over time, these commodity prices should recover, as global demand picks up and supply reaches equilibrium point, allowing BHP to reap the benefits from years of capital expenditure. In the interim, BHP's generous dividend yield should compensate the patient investor, making it, in my opinion, one of the safest bets on the share market today.
