The chairman of BHP Billiton Limited (ASX: BHP), Jac Nasser, has stated that the miner would consider taking on extra debt to fund its progressive dividend policy, which it confirmed it was committed to maintaining as recently as August.
As quoted by The Australian Financial Review, Nasser said "over a short period of time, we would look at it and consider borrowing to cover the dividend but if it risks the balance sheet over the long cycle we will not do it."
Indeed, BHP Billiton is just as committed to maintaining its A+ credit rating as it is to increasing its dividend payment to shareholders every six months. A lower credit rating would mean higher interest costs and make it more difficult to raise debt.
In that sense, it is at least pleasing to hear the chairman state that it would not be willing to compromise the strength of its balance sheet in the long run. However, I also find it concerning that the miner is considering taking on extra debt to fund the payout policy in the first place, even if it is just for the short-term.
The fact is there are strong headwinds facing the industry and falling commodity prices could act as a further weight on overall earnings. A commitment to pay out greater dividends each year could certainly impact the company's long-term financial position and strength, which would also have an impact on overall shareholder returns.
Personally, I think a normal dividend policy makes far more sense. Although there could be a great deal of investor backlash initially, the miner could pay out a percentage of its overall earnings without putting its balance sheet under too much strain.
Indeed, BHP Billiton is currently trading on a 6.8%, fully franked dividend yield, but the underlying business itself is a risky investment proposition today. If earnings continue to fall, the big miner will have little choice but to amend its current dividend policy, while it could soon have more debt to contend with as well.
